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What we still need to know

Here are what I consider the most important gaps in our current knowledge of free banking.

Free banking and monetary equilibrium. George Selgin has provided the base on which future inquiry will be built. More remains to be said about the way that bank clearings signal banks to expand, hold constant, or contract credit.

Free banking in comparison to other monetary systems. More work is needed using balance sheets, models, or other tools of systematic description for comparing in depth the operational details of various monetary systems, especially in terms of how well they discover and respond to changes in the supply of and demand for savings.

The history of free banking. Much has been done, but much remains to do. As far as I know, nobody has published a book describing in detail a single episode of free banking. (Lawrence H. White’s Free Banking in Britain was a combination of theory, economic history, and history of thought, appropriate to the time because of its pioneering nature, but it was not simply a study of how the Scottish free banking system worked and how it evolved.) Ignacio Briones, a Chilean economist, wrote a good dissertation on Chile’s free banking period of the late 1800s, but he has not published it because he is busy in his current job as coordinator of international financial affairs in the Chilean Ministry of Economy. Moreover, he wrote it while studying in France and it is in French, a language that far fewer economists today read than read English or Spanish. Anders Ögren, a Swedish economist, has written a dissertation, published as a book, on the Swedish monetary system of the 1800s, but if he is to be believed, it was not a free banking system.

Returning to free banking. What are the steps, particularly with respect to financial regulation, that would re-establish free banking with the smoothest transition? Once re-established, are there any measures that would make free banking more politically durable than it proved to be the last time around? I understand that a student at George Mason University is working on issues such as these, advised by Larry White.

Rival monetary standards and free banking. Historically, free banking has been associated with the gold or silver standard. Other standards are conceivable, and have been proposed, such as Milton Friedman’s idea to freeze the existing monetary base or the late Earl Thompson’s idea for a labor standard of value. How do different possible standards compare with respect to their theoretical properties? In the end, consumer choice would determine which was superior. People might choose gold again, in which case we would have to investigate what it is about gold that people find to be so appealing. Or competing standards might coexist without one ever gaining a decisive advantage.