ABSTRACT
Since 1975 we have witnessed a remarkable resurgence of interest in free (or laissez-faire) banking. For many years the philosophy of central banking had reigned supreme and virtually unquestioned, and even economists sympathetic to laissez-faire-for example, Mints (1950), Hayek (1960) and Friedman (1960)–readily accepted that ‘money’ and banking should not be left to the unfettered competitive process. A conventional wisdom ruled which held that competition in banking should be suppressed because it would lead to rapid inflation, or because it would destabilize the banking industry, or (somehow) because banking was a natural monopoly anyway. There was controversy over how much power the central bank should have and what it should try to do, but no respectable economist suggested that central banking itself was unnecessary or harmful until Hayek finally despaired of it in 1976 and began to argue that the only way to achieve monetary stability was to denationalize money (Hayek 1976). Hayek’s suggestion attracted considerable interest, and free banking became the focal point of a major research effort. Although the idea seemed novel and even bizarre, it soon became apparent that free banking systems had actually existed in the past and that free banking had a long and respectable history. Lawrence H.White’s Free Banking in Britain (1984b) showed that Scotland had experienced something like free banking until 1845, and this experience of free banking appeared to be very successful. Some US states had also experienced ‘free banking’ in the years before the Civil War, and Rockoff (1974), Rolnick and Weber (1983, 1984, 1986) and others re-examined these episodes and found that they were considerably more successful than traditional accounts had indicated. Free banking experiences were later uncovered in Canada (Schuler 1985), China (Selgin 1987a), Spain
(Garcia 1989) and Sweden (Jonung 1985), and it soon became obvious that there were many others which later economists had also forgotten.
