I haven’t read a lot of books on austrian economics beyond Robert Murphy’s politically incorrect guides and a few bits of Murray Rothbard’s works, but from what I understand of Austrian economics, Austrians hold that the Federal reserve with its cheap credit creates artificial booms which inevitably bust as prices rise, and this is the root cause of the Business cycle.
So why were there business cycles before the creation of the Federal reserve bank?
Because banks before the creation of the Fed engaged in Fractional Reserve banking. You don’t need a fed to create cheap credit. You just need to be able to fake your accounting.
A central bank isn’t required for there to be business cycles according to the Austrian theory. The crucial ingredient to a business cycle, central bank or no, is inflation of the money supply (i.e. the printing of paper money that isn’t backed by gold or silver). The way to do this with or without the help of a central bank is through fractional reserve banking. Under a fractional reserve system, a bank will loan out gold that was deposited in the bank as demand deposits. The problem with this system is that because the original depositors have claims to their deposited gold on demand, as do the receivers of the loans, there is an increase in the money supply, though no increase in the gold specie.
The reason central banks came into existence is because inflation of the money supply by a single bank is self-limiting. As Rothbard explains in “What Has the Government Done to Our Money”, the money loaned out in the form of paper money will make its way into the hands of people who have accounts in separate banks, and they will deposit the paper money into their banks. Their banks will quickly call on the original bank to redeem gold, and the original bank will quickly find its vaults running out of gold.
A good example of this happening is the Panic of 1819. In order to fund the War of 1812, the US government turned to banks to lend them money, but unfortunately the New England banks, which were normally the government’s go-to banks for loans, were against the war and refused to loan to the government. Therefore the government got loans from less established banks from out of the region, and these smaller banks heavily inflated the money supply way beyond what they could back in gold. Soon the bank money made its way to New England to pay for military equipment, and just as in the previous example, the money was deposited into the more well-established New England banks, and just as expected, they called on the smaller banks to redeem their gold. Had it not been for government intervention in the form of suspension of specie payment, these banks would have gone under in a second, but they were allowed to continue business though they were entirely bankrupt. It is this shaky foundation, aggravated by government intervention, that is responsible for the Panic of 1819, all achieved with no help from a central bank.
Another example is the creation of the greenback to fund the unconstitutional War to Prevent Southern Independence.
A central bank isn’t essential to give rise to monetary distortions. It merely makes it easier for governments to do so.
By the way, I’d recommend reading Tom Woods’ book Meltdown for a simple explanation of why there were recessions before the Federal Reserve.
The purpose of a central bank is to bailout the ‘private banks’ when FRB explodes. Essentially, when the private banks compromise their liquidity positions by lending out more than they have, they need central banks to intervene and provide ‘quantitative easing,’ or monetary injections. Without a central bank, many banks would fail, interest rates would soar, and the economy would be in a horrible recession.
The world economy was deeply globalized in the 19th century. As such world trade was affected by central banks in other countries, most notably the UK which had one of the first central banks.
There were central banks before Federal Reserve.
Because as Hayek pointed out, the ABCT is not a general theory.
That is true, but we have not had a commodity (e.g. agricultural) or phonomenal (e.g. weather) bust in a LONG time.
I believe I have read where there was a grain-led boom/bust cycle in the 17th or 18th century which was partially responsible for the development of Anglo-Saxon bailment laws (one of Rothbard’s banking books perhaps?). The judgement at the time was to specifically exclude banks from regular bailment requirements, which led to the legalized practice of fractional reserve banking.