In a previous post I listed what I consider to be 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. During the 20 years from Friedrich Hayek’s revival of interest in free banking in 1976, researchers on free banking made great progress rediscovering the past and melding old ideas with newer ones. They succeeded in bringing the theory of free banking up to date from the mid 19th century, the last time it had enjoyed development by a group of keen minds rather than just by scattered individual thinkers.
In the last 15 years the earlier pace of progress has not continued. Partly it is the nature of scholarship: creative ideas come in bursts, and every discipline has its slow periods after the ideas have been digested. Partly it is because the core group of researchers, including some of the other bloggers on this site, is nearly the same as it was 20 years ago; new ideas usually require fresh blood. Here are what I consider the most important ideas that have been developed since those I mentioned in the earlier post.
- George Selgin explored how the ideal of neutral money fit with the fashion for inflation targeting among central banks. His monograph Less Than Zero argued that compared to the ideal of neutral money, inflation targeting would tend to produce inflation that was too high during booms and too low during busts. Selgin also argued that free banking approached the ideal of neutral money more closely than central banking.
- The ideal of neutral money provided a basis for researchers on free banking and fellow travelers among the Austrian economists to criticize the monetary policy of the Federal Reserve and some other central banks over the last five or six years. Before the global recession they were among the few to worry that monetary policy was too expansionary. After the recession began, they were among the first to be persuaded by Scott Sumner, or to conclude on their own, that the policies of the Federal Reserve and the European Central Bank in particular were too contractionary. Many researchers on free banking consider that nominal GDP targeting or something similar would more nearly approach the ideal of neutral money for central banking policy than inflation targeting does, though not as closely as free banking would. And now, a step down in importance from the top two ideas, two others:
- Note issue by federally chartered banks is legal in the United States.
- There has been more research on and argument about historical cases of free banking, such as Anders Ögren’s research on Sweden and Ignacio Briones’s research on Chile (links are to only to bits of their larger bodies of research).
This list is not an exhaustive catalog of "new" ideas; it simply includes what I consider to be the top ones. There has been other very good work, such as Selgin's research on free-market coinage, that has expanded our knowledge of free banking but that does not seem to me to be as central to the development of the subject. I invite reactions from my fellow bloggers and from readers.