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What's old (and some classics)

Brad asked about the free banking book classics. What I had already planned to write, below, partly answers his question.

Current thinking about free banking began with Friedrich Hayek’s 1976 pamphlet Denationalisation of Money (link is to an expanded version first issued in 1978 and reprinted in 1990). Until then, the idea of free banking had received no sustained attention from economists since the 1800s. Hayek’s timing was good: he wrote at a time of accelerating inflation in many Western countries, and his 1974 Nobel Memorial Prize in economics gave him a certain celebrity. Denationalisation of Money brought belated attention to a 1936 book by one of Hayek's students, Vera Smith (after marriage, known as Vera Lutz). Smith's book, The Rationale of Central Banking, remains essential reading on free banking.

The next big step forward in developing the idea of free banking was Lawrence H. White’s 1984 book Free Banking in Britain (link is to the 1995/2008 second edition). Whereas Hayek’s approach was mainly theoretical, White explained how the Scottish system of free banking had enjoyed practical success for more than a century, until ended by law in 1845. White’s book was a mixture of economic theory, economic history, and history of thought.

Most subsequent writing on free banking has been a development of themes that were in Hayek or White. Here are what I consider the most important ideas on free banking that have been well known for at least 15 years among those of us interested in the subject — the "what's old" that I mentioned in my previous post.

  1. There is a sophisticated theoretical case to be made for free banking as the monetary system that best promotes monetary equilibrium. (George Selgin is the key thinker here with his 1988 Theory of Free Banking; Steve Horwitz has also done work on the topic.)
  2. Central banking is subject to the criticisms of centralized economic planning that Ludwig von Mises and Hayek made in the 1920s and 1930s, which other economists acknowledged as valid when communism collapsed in the late 20th century. Mainstream monetary theory indirectly addresses the criticism by claiming that money is a natural monopoly, but to my knowledge it has not tried to rebut the Mises-Hayek arguments head on.
  3. Free banking systems existed in dozens of countries until the early 1900s, and most seem to have worked successfully – much better in some ways than the central banking systems that replaced them. (An essay of mine in a book edited by Kevin Dowd, The Experience of Free Banking, is no classic, but it remains the best short overview of the subject. Unlike the other works I have linked to, it is unfortunately quite expensive.)
  4. Historical cases of free banking were typically associated with a gold or silver standard. A contemporary free banking system might operate on a different kind of monetary standard. Theorizing on this topic necessarily involves some leaps of imagination.