Luke

Criticisms of Free Banking

Criticisms from Conventional Wisdom

The first main argument which is made against free banking is, if free banking is desirable, why has it not been adopted and why would economist and policy makers worldwide have such strong support for central banking? This argument can be easily combated by noting the lack of serious thought or a fair chance to succeed, do not prove it would not work. Historical evidence shows that when implemented, such as in Sweden, Scotland and China, it failed politically not because of lack of function. Also, it can not be seen as a failture to the free banking system from the early 19th century in the United States when “free banking” was not free banking at all. During this era, it was more approapriatly called “bond deposit” banking, and the tight regulations which prohibited banks from forming branch networks to help stability and efficiently was what ultimately led to the failure of these “free” banks at the time.

Fraud and Counterfeiting

The criticism that free banking was more supseptable to fraud was started by Thomas Tooke and continued by Milton Friedman.

Friedman stated in A Program for Monetary Stability:

The very performance of its central function requires money to be generally acceptable and to pass from hand to hand. As a result, individuals may be led to enter into contracts with persons far removed in space and acquaintance, and a long period may elapse between the issue of a promise and the demand for its fulfillment. In fraud, as in other activities, opportunities for profit are not likely to go unexploited. A fiduciary currency is therefore likely…. to be overissued.

Friedman used examples from the so-called “free banking” period in early 19th century when fraudulant notes where being highly used, but like we mentioned earlier, the regulated bond-deposit requirements were to fault for fraud rather then anything inherent to free banking. The other main argument for free banking's acceptability to fraud, comes from belief that the long period of time during which bank notes are in circulation will lead to higher counterfit rate, which is true, but the assumption this is more prevalent in free banks is false. For example, when looking at Scotland, during the height of the Free Banking system, around 1870’s, they had very short periods of circulation of their bank notes and thus, low amount of forged notes.