What Is Free Banking, and Why Should I Care?

What would happen if we didn’t have a central bank? Prof. Lawrence H. White explains that private banks would be able to circulate money by issuing notes and checks redeemable for coin. Trustworthy banks would make arrangements to accept each other’s notes and checks. Banks would have better incentives than the federal government to ensure their currency retained its value, because if it didn’t, people would bank elsewhere. By contrast, central banks controlled by the government are able to devalue currency as they see fit and can even quit redeeming notes for coins of real value if they want to do so. It sounds like social-science fiction, but there are numerous real-world examples in history of successful free-banking systems. In fact, central banks arose largely because governments wanted an institution willing and able to lend them money with easy terms, not because of any problem with the free-banking system. Free markets offer the most efficient system for allocating goods and services, and money is no exception. As failures among central banking systems mount, it is time to reconsider the alternative of free banking.

7 Comments

  1. Emerson Howard

    Here’s to Bitcoin! I am optimistic that it will continue to gain support and credibility as a currency–a currency with huge ramifications on big government. 

  2. Andrei-Claudiu Roibu

    Imagine a world with no National Bank. More, imagine a world with private owned money, issued by multiple agents. Anarchy! you will cry out. Well, not really. 

    If we were to eliminate a central national bank from the monetary system of a country, and leave private owned banks to regulate themselves, than, they will be forced by the complexity of the money trails to self regulate. If not, the failure of one or two will lead to the failure of them all, and, that is bad business. Banks will be forced by market pressure to provide good, reliable services and banknotes, or private money, that has a stable value and which offers it’s users, or clients, a good feeling of stability. 
    In opposition to national banks, private banks will not accept working on large debts, like lending large sums of money to a state in the long hope that they will receive it back. Also, they will not accept making bad and risky investments, or fluctuating monetary value, because that will scare potential clients away, the lower profits (see what happened with the Swiss frank a few years ago). In other words, the fear of economic failure and the fear loosing your clients are the best insensitive that will make private banks play by the rules and keep the markets going, even in the absence of a national, centralized bank.  
  3. Anonymous

    Would free banking be easier to implement now where so many don’t require cash (banknotes)? Also could a system rise up parallel to the current system that would over time make the current fed system obsolete?  What would the transition to a free banking system look like?

  4. Island_danni

    the problem with the federal reserve today is that the "notes" they are printing are not backed by something tangible like gold or silver  which is why inflation is running so high.

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