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Handbook of International Banking

Handbook of International Banking

Elgar original reference

Edited by Andrew W. Mullineux and Victor Murinde

The Handbook of International Banking provides a clearly accessible source of reference material, covering the main developments that reveal how the internationalization and globalization of banking have developed over recent decades to the present, and analyses the creation of a new global financial architecture.

Chapter 7: Free Banking

Kevin Dowd

Subjects: economics and finance, financial economics and regulation, money and banking


Kevin Dowd* 1 INTRODUCTION A free banking system is a financial system with no central bank or other financial or monetary regulator, and no government intervention. It therefore allows financial institutions to operate freely, subject only to the discipline of market forces and the rules of ‘normal’ commercial and contract law. Free banking is thus equivalent to financial laissez-faire. Although the idea is strange to most modern economists, there are in fact many instances of (relatively) free banking in the historical record,1 and there were vigorous controversies about it in a number of countries in the early nineteenth century (see, for example, Smith, 1936, ch. 6; White, 1984, ch. 4). The notion of free banking was then largely forgotten, even among economists favourable to laissez-faire,2 and was only rediscovered in the last quarter of the twentieth century after Friedrich Hayek resurrected the idea in a famous pamphlet in 1976 (Hayek, 1976). Hayek’s proposal attracted considerable attention, and subsequently gave rise to a substantial literature on the topic.3 The argument for free banking is essentially an application of the general argument for free trade: if free trade is generally desirable, as most economists agree, then presumably free trade is also desirable in individual sectors of the economy, including financial services, and free trade in financial services is free banking. And if free banking is desirable, the whole panoply of government intervention into the financial sector – central banks, government-sponsored deposit insurance, and government regulation of the financial system – should be...

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