The Law of National Guaranteed Banks in Argentina, 1887–1890: Free-Banking Failure or Regulatory Failure?

NICOLAS CACHANOSKY
THE INDEPENDENT REVIEW 16.4 (2012): 569-590

Many analysts have characterized Argentina’s four years under the Law of National Guaranteed Banks as a period of “free banking.” This system proved to be unstable, resulting in the financial crisis of 1980. Cachanosky argues, however, that the banking crisis did not originate due to free banking, the lack of proper regulation, or the absence of a formal lender of last resort. As guaranteed banks vigorously expanded the money supply, they ultimately created a banking crisis. The law, however, imposed very specific, though inefficient, requirements and regulations on money and banking. These regulations changed the economic incentives altogether and created a dangerous dynamic that was the real cause of the crisis. Thus, Argentina’s Law of National Guaranteed Banks is best understood as a case of regulatory, rather than free-banking failure.