Free Banking as an Evolving System: The Case of Switzerland Reconsidered

Abstract

Selgin and White (1987) argue that during its evolution a free banking system can be expected to reach certain stages of development. This paper uses their conceptual framework to investigate the free banking era in 19th century Switzerland and makes three contributions to the literature on free banking. First, I find that the development of the Swiss banking system closely matches the stylized evolutionary path depicted by Selgin and White (1987). Second, I argue that after the introduction of the federal banknote law in 1882, the Swiss banking system can no longer be characterized as one of free banking. Third, I maintain that the evolutionary approach offered by Selgin and White (1987) opens the door to a better explanation of inter-bank note exchange complications during the 30 years preceding the introduction of a Swiss central bank in 1907 than alternative approaches.

Keywords: free banking, Switzerland, evolution, clearing arrangements

JEL Classification: N23, E42