This is a revised excerpt from White (2015), and the first item in our “What You Should Know” series offering essential background information on various alternative money themes.
Historical monetary systems that are properly classified as free banking systems, in Kevin Dowd’s (1992, p. 2) words, have involved “at least a certain amount of bank freedom, multiple note issuers, and the absence of any government-sponsored ‘lender of last resort.” There were 60-plus episodes around the world of plural private currency issue in the 19th century (Schuler 1992). Dowd (1992) has compiled studies of 9 of these episodes, and Ignacio Briones and Hugh Rockoff (2005) have surveyed economists’ assessments of 6 relatively well-studied episodes: Scotland, the United States, Canada, Sweden, Switzerland, and Chile. Because none of the six systems they review enjoyed complete freedom from legal restrictions, they suggest that “lightly regulated banking” is a more accurate label than “free banking.” All these nineteenth-century episodes had another feature worth mentioning: banknotes and deposits were denominated in and redeemable for silver or gold coins.
When we look into these episodes, we find a record of innovation, improvement, and success at serving money-users. As in other goods and services, competition provided the public with improved products at better prices. The least regulated systems were not only the most competitive but also by and large the least crisis-prone.