Free Banking in History and Theory

32 Pages Posted: 12 May 2014  

Lawrence H. White

George Mason University - Department of Economics

Date Written: May 10, 2014

Abstract

This paper surveys economists’ work on the theory and the history of free banking regimes. Support for free banking - a laissez-faire monetary system without a central bank, typically conceived as operating under a commodity standard - has been much rarer than support for free trade, even among self-identified free-market economists. Yet where something close to a free banking system was given a trial, for example in Scotland and Canada (seven other cases are also reviewed), the consensus among economic historians finds that it functioned better for the typical user of money and banking services than more heavily restricted systems in other countries. The widespread adoption of central banking, despite the success of free banking, can be explained by the latter’s fiscal advantages to national governments. The standard arguments for deposit insurance, and the leading counter-arguments, are also reviewed. Recent work on the importance of credible commitments - in monetary, fiscal, and bank regulatory policies - has the potential to reinvigorate the case for free banking on a commodity standard.

Keywords: Free Banking, Central Banks, commodity standard

JEL Classification: E40, E42, E50

Suggested Citation

White, Lawrence H., Free Banking in History and Theory (May 10, 2014). GMU Working Paper in Economics No. 14-07. Available at SSRN: https://ssrn.com/abstract=2435536 or http://dx.doi.org/10.2139/ssrn.2435536

Lawrence H. White (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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