Free banking

This article is about an economic system. "Free banking" also refers to the provision of indirectly-funded transactional accounts, which often rely on bank charges.

Free banking is a monetary arrangement where banks are free to issue their own paper currency (banknotes) while also being subject to no special regulations beyond those applicable to most enterprises.

In a free banking system, market forces control the total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of fiat money issued by a central bank.

In the strictest versions of free banking, however, there is either no role at all for a central bank, or the supply of central bank money is supposed to be permanently "frozen". There is, therefore, no government agency acting as a monopoly "lender of last resort", leaving that to the private sector as happened in the US in the panic of 1907. Nor is there any government insurance for banknotes or bank deposit accounts.

Notable supporters include Fred Foldvary, David D. Friedman, Friedrich Hayek, George Selgin, Steven Horwitz, and Richard Timberlake.

While Hayek is generally considered to be the pioneering proponent of free banking in the post war era with his 1976 tract, The Denationalization of Money, prior to him economist Benjamin Klein in his article The Competitive Supply of Money (1974) had argued in its favour.

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