Free banking is a term that refers to the total deregulation of
the banking industry. It signifies an absence of such constraints
as reserve requirements, capital requirements, government deposit
insurance, and limitations on branching. Above all, it means that
private banks would be allowed to issue their own currency. This
book takes a fresh approach to that controversial topic. Sechrest
proposes that free banking constitutes the final vindication of
Say's Law, that the optimal monetary goal, monetary equilibrium,
can only be achieved under free banking, that the monetarist and
Austrian business cycle theories are complementary, and that the
most likely form of free banking will be that in which banks issue
specie-convertible notes and hold fractional reserves.
After defining free banking the author explains why he adopts
the well known White-Selgin model. He then discusses the key
characteristics of laissez-faire banks, which form the basis for a
formal model, complete with graphs, which may be used in the
classroom. The unique relationship between the market for money and
the market for time that exists under free banking suggests that
business cycles will be minimized under such a regime. That
relationship also leads to the insight that the Austrian and
monetarist cycle theories are really two sides of the same coin.
New evidence is presented that leads the author to the conclusion
that both Lawrence White's portrayal of Scottish free banking and
the traditional image of American free banking are exaggerated.
Three different basic models of free banking are then reviewed in
detail and critiqued. Finally, the author suggests both some
possible topics for future research and that free banking is
desirable socially and politically as well as economically.
General
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