Ben

Evolution of a Free Banking System

A free banking system would be quite unpredictable as to it success due to the scarcity of free banking periods in the past along with the few episodes that did occur, none were instituted to its full potential. However, this makes it very difficult to theorize how effective the free banking system would be in the future. The imaginary society of Ruritania would act as our best form of theory, based on particular instances of past free banking periods, to display its effectiveness. Their are four cruicial stages to Ruritania:

1. The warehousing or bailment of idle commodity money 2. the transition of money custodians from bailees to investors of deposited funds (and the corresponding change in the function of banks from bailment to intermediation) 3. The development of assignable and negotiable instruments of credit (inside money) 4. The development of arrangements for the routine exchange (clearing) of inside monies of rival banks. (Dowd, 17) Each stage must follow the previous chronologically and through people's self interest a free banking system can be acheived.

US banking in the "free banking" period One of the most notable political issues for Andrew Jackson's presidency was the fight against the second bank and its attempts to get re-chartered once its charter had expired in 1836. The bill was vetoed and a period of free-banking would follow.

In New York in 1825 a report to the state senate was issued suggesting the repeal of restrictions against non-chartered banks into the banking system seeing as chartering process for banks was seen as scandolous.(Dowd) However, noteholder safety became a serious concern.