At 04:05 PM 8/27/97 -0400, Robert Hettinga wrote:

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Vitamin B: Your Daily Dose of Bionomics

August 27, 1997

Back to the Future

"In the pre-Civil War period, when the general ethos of laissez faire severely discouraged government intervention in the market economy, private regulations arose in the form of a variety of institutions, which accomplished much of what we endeavor to do today with our elaborate system of government rule making and supervision. In particular, scholars have noted that the period saw the development of private measures to help holders of bank notes protect themselves from risk. As the notes were not legal tender, there was no obligation to accept the currency of a suspect bank, or to accept it at par value; accordingly, notes often were accepted and cleared at less than par. As a result, publications--bank note reporters--were established to provide current information on market rates for notes of different banks based on their creditworthiness, reputation, and location, as well as to identify counterfeit notes. Bank note brokers created a ready market for notes of different credit quality. In some areas, private clearinghouses were established, which provided incentives for self-regulation. "

"Banks competed for reputation, and advertised high capital ratios to attract depositors. Capital to asset ratios in those days often exceeded one-third. One must keep in mind that then, as now, a significant part of safety and soundness regulations came from market forces and institutions. Government regulation is an add-on that tries to identify presumed market failures and, accordingly, substitute official rules to fill in the gaps. "

"To be sure, much of what developed in that earlier period was primitive and often ineffectual. But the financial system itself was just beginning to evolve. " ...

Your description reminds me of some descriptions of how UNIX has been evolving. I guess with time and the appropiate types of hackers, any system can become secure after a few cycles. It may not be elegant but it gets the job done.