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This unreferenced section requires citations to ensure verifiability.
Free banking includes:
Free entry of banking and fiduciary producers
Freedom to issue banknotes (promissory notes issued by a bank payable to bearer on demand).
Freedom to accept money on deposit to current account, and to pay and collect cheques for customers
Freedom to borrow money on term deposit and other forms of secured and unsecured borrowing
Freedom to lend money and otherwise invest the bank's assets
Freedom to provide guarantees, documentary letters of credit, performance bonds and to incur other off balance sheet exposures.
[edit] Tags:Bare Urls,Citations,Link Rot,Disputed,Neutrality,Government,Public Finance,Policies,Economic Policy,Monetary Policy,Investment Policy,Industrial Policy,Social Policy,Fiscal Policy,Budgetary Policy,Budget,Deficit Spending,Debt,Internal,Interest Rate,Discount Window,Reserve Requirements,Gold Reserves,Monetary Authority,Trade Policy,Non-tariff Barrier,Gains From Trade,Trade Diversion,Free Trade,Revenue,And Spending,Non-tax Revenue,Mandatory Spending,Balanced Budget (fiscal),Price Stability (monetary),Monetary Reform,Transactional Accounts,Bank Charges,Fred Foldvary,David D. Friedman,Friedrich Hayek,George Selgin,Lawrence H. White,Steven Horwitz,Verifiability,Banknotes,The Denationalization Of Money,Lawrence White,Charles Timberlake,Australia,Branch Banking,Land Price Crash,Building Societies,Bankruptcy,Switzerland,Swiss Cantons,Deregulated,Scottish, | |||||||||||||||
| History | 2>
The free banking movement got its modern start with The Denationalization of Money, by Friedrich Hayek, who advocated that national governments stop claiming a monopoly on the issuing of currency, and allow private issuers like banks to voluntarily compete to do so.
In the 1980s, this expanded into an increasingly elaborate theory of free market money and banking, with proponents Lawrence White, George Selgin, and Charles Timberlake increasingly centering their writing and research around the concept, either regarding modern theory and application, or researching the history of spontaneously free banking.
Banking has been more regulated in some times and places than others, and some times and places it has hardly been regulated at all, giving some experiences of more or less free banking.
Australia. In the late 19th century, banking in Australia was subject to little regulation. There were four large banks with over 100 branches each, that together had about half of the banking business, and branch banking and deposit banking were much more advanced than other more regulated countries such as the UK and USA. Banks accepted each other's notes at par. Interest margins were about 4% p.a. In the 1890s a land price crash caused the failure of many smaller banks and building societies. Bankruptcy legislation put in place at the time gave bank debtors generous terms they could restructure under, and most of the banks used this as a means to restructure their debts in their favor, even though they didn't really need to.
Switzerland.[7] In the 19th Century several Swiss cantons deregulated banking, allowing free entry and issue of notes. Cantons retained jurisdiction over banking until the enactment of the Federal Banking Law of 1881. The centralisation of note issue reduced the problem of the existence of "a bewildering variety of notes of varying qualities ... at fluctuating exchange rates."[8]
Scottish Free Banking.[7] This period lasted between 1716 and 1845. The Bank of Scotland, the original Scottish bank charter and The Royal Bank of Scotland, chartered by England, issued competitive currencies. This resulted in a "currency war" in 1727. The result was a cooperative equilibrium, where both banks agreed to accept rival banks' notes in the ordinary course of business. This area of study has been developed further by Lawrence H. White in his book Free Banking in Britain: Theory, Experience and Debate 1800-1845[9] This example has been contested by Murray Rothbard,[10] resulting in a reply by White.[11]
United States.[7] Although the period from 1837 to 1864 in the U.S. is often referred to as the Free Banking Era, the term is something of a misnomer, for it refers not to a general system of "free" banking in the literal sense described previously, but rather to various state banking systems based on so-called "free banking" laws, which, though they made it unnecessary for new entrants to secure charters (each of which was subject to a vote by the state legislature), nonetheless restricted their undertakings in important ways. Most importantly, U.S. "free" banks were denied the right to establish branch networks, and had to "secure" their notes by purchasing and surrendering to state banking authorities certain securities those authorities deemed eligible for the purpose. The securities in many cases included bonds of the authorizing state governments themselves; and it has been determined that the depreciation of these very securities was the chief cause of "free bank" failures, and indeed of bank failures generally, during the period in question. The lack of branch banking, in turn, caused state-issued banknotes to be discounted at varying rates once they had traveled any considerable distance from their sources. In short, the shortcomings of banks and bank-supplied paper currency during the so-called "free banking era" in the U.S., far from establishing the need for special regulation of banks, testifies to the dangers of unwarranted or unwise regulation. Then, from 1863 to 1913, known as the National Banks Era, state-chartered banks were still operating under a free banking system. Some scholars have found that the system was mostly stable.[12]
Sweden.[7] Sweden had two periods of free banking, 1830–60 and 1860-1902. Following a bank crisis in 1857, there was a rise in popular support for private banks and private money issuers (especially Stockholms Enskilda Bank, founded in 1856). A new bank law was adopted by parliament in 1864, deregulating the interest rate. The following decades marked the height of the Swedish free banking era. After 1874, no new private banks were founded. In 1901, issuing of private money was prohibited. Work on the Swedish free banking era has been done by Per Hortlund and Erik Lakomaa.[13] Erik Lakomaa (The Quarterly Journal of Austrian Economics, Summer 2007), has demonstrated that the Swedish experiment in free banking was successful. It reduced booms and busts. Only one bank went bankrupt for 70 years, an event related to fraud and not to excessive lending as has happened wherever central banking has been practiced.[citation needed]
There is speculation that with electronic currencies free banking can evolve into anonymous internet banking. The implications of this for the monetary system are unknown, and much of the rigorous theory in this area has been abandoned for a "wait and see" attitude.[citation needed]
[edit] | Tags: References | 2>
^ Free Banking Explained - The Progress Report November, 2008
^ "Gold, Paper, Or...Is There a Better Money?". Cato.org. 1982-09-23. http://www.cato.org/pubs/pas/pa017.html. Retrieved 2012-03-08.
^ Friedrich Hayek (1976). The Denationalisation of Money. Coronet Books Inc. ISBN 978-0-255-36239-9. http://www.iea.org.uk/publications/research/denationalisation-of-money.
^ "Region Focus Winter 2009: Related Links for Interview of George Selgin - Federal Reserve Bank of Richmond". Richmondfed.org. http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm. Retrieved 2012-03-08.
^ "Dr. Lawrence H. White | Foundation for Economic Education". Fee.org. 2008-12-23. http://www.fee.org/articles/dr-lawrence-h-white/. Retrieved 2012-03-08.
^ Monetary Evolution, Free Banking, and Economic Order, (Westview Press, 1992) ISBN 0-8133-8514-8.
^ a b c d Briones, Ignacio and Hugh Rockoff. "Do Economists Reach a Conclusion on Free-Banking Episodes?", Econ Journal Watch, Vol.2, No.2 (August 2005), pp.279-324.[1]
^ The Central Bank and the Financial System, Charles Albert Eric Goodhart, p. 211.
^ Lawrence H. White, Free Banking in Britain: Theory, Experience and Debate 1800-1845, London: Institute of Economic Affairs, 1995, ISBN 0-255-36375-3.
^ Rothbard, Murray The Myth of Free Banking in Scotland
^ George Selgin and Lawrence H. White, In Defense of Fiduciary Media- or, We are Not Devo(lutionists) We are Miseasians, The Review of Austrian Economics, Vol. 9, No. 2, (1996):83-107 ISSN 0889-3047.
^ Microeconomics of Banking, De Xavier Freixas, Jean-Charles Rochet, p. 261.
^ The Provision of Liquidity in the Swedish Note Banking System., Per Hortlund.
Ebenstein, Alan. Friedrich Hayek: A Biography. University of Chicago Press, 2003. Print.
Selgin, George. The Theory of Free Banking. Rowman & Littlefield Publishers, Inc., 1988. Print.
White, Lawrence. Competition and Currency: Essays on Free Banking and Money. New York University Press, 1992. Print.
[edit] | Tags: External links | 2>
Rothbard, Murray. The Mystery of Banking, Ludwig von Mises Institute. 2008.
Rothbard, Murray. The Myth of Free Banking in Scotland, Ludwig von Mises Institute. 2008.
Automatic Stabilizing Mechanisms Under Free Banking (pdf) by Kevin Dowd
Mutual Banking (1974 reprint of 1946 Modern Publishing edition), Mutual Banking (1850 edition) by William Batchelder Greene
[2] Vera Smith's 1936 book, Rationale for Central Banking]
Reinventing Money
Walter Bagehot: Lombard Street: A Description of the Money Market (1873) Library of Economics and Liberty
Friedrich A. Hayek: "The Use of Knowledge in Society" (1945) Library of Economics and Liberty
George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note Issue (1988) Library of Economics and Liberty
Kevin Dowd: Automatic Stabilizing Mechanisms Under Free Banking (pdf)
George Selgin and Lawrence White: "In Defence of Fiduciary Media or: We are not Devolutionists, we are Misesians!" The Review of Austrian Economics, Vol. 9, N°2, 1996, 83-107
William Batchelder Greene: Mutual Banking, 1974 reprint of 1946 Modern Publishing edition, 1850 edition
Vera Smith: The Rationale of Central Banking (1936) Library of Economics and Liberty
Rothbard, Murray. The Mystery of Banking, Ludwig von Mises Institute, 2008
Rothbard, Murray. The Myth of Free Banking in Scotland, Ludwig von Mises Institute. 2008.
Michael S. Rozeff: "Rothbard on fractional reserve banking - a critique." Independent Review', March 22, 2010
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