Free banking is a monetary arrangement where banks are free to issue their own paper currency (banknotes) while also being subject to no special regulations beyond those applicable to most enterprises.

In a free banking system, market forces control the total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of fiat money issued by a central bank.

In the strictest versions of free banking, however, there is either no role at all for a central bank, or the supply of central bank money is supposed to be permanently "frozen". There is, therefore, no government agency acting as a monopoly "lender of last resort", leaving that to the private sector as happened in the US in the panic of 1907. Nor is there any government insurance for banknotes or bank deposit accounts.[1]

Notable supporters include Milton Friedman,[2] Fred Foldvary,[3] David D. Friedman,[4] Friedrich Hayek,[5] George Selgin,[6] Steven Horwitz,[7] and Richard Timberlake.[8]


Banking has been more regulated in some times and places than others, and in some times and places it has hardly been regulated at all, giving some experiences of more or less free banking. Free banking systems have existed in more than 60 countries. The first system of competitive issuance of notes began more than 1,000 years ago in China (see below). Free banking was widespread in the 19th and early 20th centuries. Dowd, Kevin, ed. (1992), The Experience of Free Banking, London: Routledge lists the most currently known episodes of free banking and discusses in some depth a number of them, including Canada, Colombia, Fuzhou, France, and Ireland. Monetary arrangements with monopoly issues of notes, including government treasury issues, currency boards, and central banking, replaced all episodes of free banking by the mid-20th century. There were several reasons for the demise of free banking:

Some prominent 18th and 19th century economists, most notably Adam Smith,[9] defended free banking as opposed to the real bills doctrine.[10] After the mid 19th century, though, economists interested in monetary issues focused their attention elsewhere, and free banking received little attention. Free banking as a subject of renewed debate among economists got its modern start in 1976 with The Denationalization of Money, by economist Friedrich Hayek, who advocated that national governments stop claiming a monopoly on the issuing of currency, and allow private issuers like banks to voluntarily compete to do so.

In the 1980s, this expanded into an increasingly elaborate theory of free market money and banking, with proponents Lawrence White, George Selgin, and Richard Timberlake increasingly centering their writing and research around the concept, either regarding modern theory and application, or researching the history of spontaneously free banking.


In the late 19th century, banking in Australia was subject to little regulation. There were four large banks with over 100 branches each, that together had about half of the banking business, and branch banking and deposit banking were much more advanced than in other more regulated countries such as the UK and US. Banks accepted each other's notes at par. Interest margins were about 4% p.a. In the 1890s a land price crash caused the failure of many smaller banks and building societies. Bankruptcy legislation put in place at the time gave bank debtors generous terms they could restructure under, and most of the banks used this as a means to restructure their debts in their favor, even though they did not really need to.[citation needed]


In the 19th century, several Swiss cantons deregulated banking, allowing free entry and the issue of notes.[11] Cantons retained jurisdiction over banking until the enactment of the Federal Banking Law of 1881. The centralisation of note issue reduced the problem of the existence of "a bewildering variety of notes of varying qualities ... at fluctuating exchange rates."[12]


Scottish free banking lasted between 1716 and 1845, and is arguably the most researched and developed instance of free banking.[13] The system was organized around three chartered banks – the Bank of Scotland, the Royal Bank of Scotland, and the British Linen Company – and numerous unchartered banks. It resulted in a highly stable and competitive banking system.[14][15]

United States

Main article: History of central banking in the United States § 1837–1862: "Free Banking" Era

See also: Wildcat banking

Although the period from 1837 to 1864 in the US is often referred to as the Free Banking Era, the term is a misnomer in terms of the definition of "free banking" above. Free Banking in the United States before the Civil War refers to various state banking systems based on what were called "free banking" laws at the time. These laws made it necessary for new entrants to secure charters, each of which was subject to a vote by the state legislature with obvious opportunities for corruption. These general banking laws also restricted banks' activities in important ways.[16][17][18][19] Most importantly, US free banks could have only one office and had to provide security for their notes not only through gold reserves but also by purchasing and surrendering to state banking authorities certain securities the state law deemed acceptable for the purpose. The securities generally included bonds of state governments. The depreciation of these bonds was the chief cause of bank failures in various episodes when many banks in a state failed. The lack of branch banking, in turn, caused state-issued banknotes to be discounted at varying rates once they had traveled any considerable distance from their sources, which was an inconvenience. Depreciation of assets more generally is also used to explain failures.[20] Several authors attribute the high-rate of bank failures during the Free Banking era in the US ultimately to restrictions on banks' portfolios of assets.[21][22] Then, from 1863 to 1913, known as the National Banks Era, state-chartered banks operated under a free banking system. Some scholars have found that the system was mostly stable compared to the National Banks of that era.[23]


Sweden had two periods of free banking, 1830–1860 and 1860–1902. Following a bank crisis in 1857, there was a rise in popular support for private banks and private money issuers (especially Stockholms Enskilda Bank, founded in 1856). A new bank law was adopted by parliament in 1864, deregulating the interest rate. The following decades marked the height of the Swedish free banking era. After 1874, no new private banks were founded. In 1901, issuing of private money was prohibited. Research on the Swedish free banking era suggests stability, and a single bank failure related to fraud in 70 years.[24][25]


Jiaozi was a form of banknote that appeared around the 10th century in the Sichuan capital of Chengdu, China. Between 960 and 1004, the bank notes were totally run by private merchants. Until the government decided to regulate the business due to alleged increasing fraud cases and disputes, it granted 16 licenses to the biggest merchants of all.[26]

See also


  1. ^ Selgin, George A.; White, Lawrence H. (1994). "How Would the Invisible Hand Handle Money?". Journal of Economic Literature. 32 (4): 1718–1749. JSTOR 2728792.
  2. ^ Friedman, Milton (1987). "Has Government Any Role In Money?" (PDF).
  3. ^ Foldvary, Fred E. (November 2008). "Free Banking Explained". The Progress Report. Archived from the original on 2009-08-11. Retrieved 2010-01-24.
  4. ^ Friedman, David D. (1982-09-23). "Gold, Paper, Or...Is There a Better Money?". Policy Analysis No. 17. Cato Institute. Retrieved 2012-03-08.
  5. ^ Hayek, Friedrich (1976). The Denationalisation of Money. Coronet Books. ISBN 978-0-255-36239-9.
  6. ^ "Interview: George Selgin". Region Focus. Federal Reserve Bank of Richmond. Winter 2009. Archived from the original on 2012-02-22. Retrieved 2012-03-08.
  7. ^ Horwitz, Steven (1992). Monetary Evolution, Free Banking, and Economic Order. Westview Press. ISBN 978-0-8133-8514-3.
  8. ^ Timberlake, Richard; Dowd, Kevin (1998). Money and the Nation State. Transaction Publishers. ISBN 9781412828956.
  9. ^ An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Book II, chapter 2, final paragraph, p. 286.
  10. ^ White, Lawrence H. (2015-09-16). "Free Banking Theory versus the Real Bills Doctrine". Cato Institute. Retrieved 2019-08-06.
  11. ^ Briones, Ignacio; Rockoff, Hugh (August 2005). "Do Economists Reach a Conclusion on Free-Banking Episodes?". Econ Journal Watch. 2 (2): 279–324.
  12. ^ Goodhart, Charles Albert Eric (1995). The Central Bank and the Financial System. MIT Press. p. 211. ISBN 9780262071673.
  13. ^ White, Lawrence H. (1995). Free Banking in Britain: Theory, Experience and Debate 1800–1845. London: Institute of Economic Affairs. ISBN 978-0-255-36375-4.
  14. ^ Kroszner, Randy (1995). "Free Banking: The Scottish Experience as a Model for Emerging Economies" (PDF). Policy Research Working Papers (1536). World Bank. doi:10.1596/1813-9450-1536. ((cite journal)): Cite journal requires |journal= (help)
  15. ^ White, Lawrence H. (1992), "Free Banking in Scotland before 1844", in Dowd, Kevin (ed.), The Experience of Free Banking, London: Routledge, pp. 157–186
  16. ^ Ng, Kenneth (1988). "Free Banking Laws and Barriers to Entry in Banking, 1838-1860". The Journal of Economic History. 48 (4): 877–889. doi:10.1017/s0022050700006653. JSTOR 2121621. S2CID 155043151.
  17. ^ Bodenhorn, Howard (1990). "Entry, Rivalry and Free Banking in Antebellum America". Review of Economics and Statistics. 72 (4): 682–686. doi:10.2307/2109610. JSTOR 2109610.
  18. ^ Economopoulous, Andrew; O'Neill, Heather (1995). "Bank Entry during the Antebellum Period". Journal of Money, Credit and Banking. 27 (4): 1071–1085. doi:10.2307/2077790. JSTOR 2077790.
  19. ^ Rockoff, Hugh (1991). "Lessons from the American Experience with Free Banking". In Capie, Forrest; Wood, Geoffrey Edward; Pepper, Gordon (eds.). Unregulated banking : Chaos or Order?. London: Macmillan. doi:10.3386/h0009. ISBN 978-0-333-52049-9.
  20. ^ Rolnick, Arthur J.; Weber, Warren E. (1984). "The causes of free bank failures: A detailed examination". Journal of Monetary Economics. 14 (3): 267–291. doi:10.1016/0304-3932(84)90044-8.
  21. ^ Dwyer, Gerald P. (1996). "Wildcat Banking, Banking Panics and Free Banking in the United States" (PDF). Federal Reserve Bank of Atlanta Economic Review. 81 (3–6): 1–20. Archived from the original (PDF) on 2015-09-07. Retrieved 2018-06-01.
  22. ^ Calomiris, Charles W. (2010). "The Great Depression and Other 'Contagious' Events". In Berger, Allen N.; Molyneux, Philip; Wilson, John O. S. (eds.). The Oxford Handbook of Banking. Oxford University Press. pp. 693–710.
  23. ^ Freixas, Xavier; Rochet, Jean-Charles (1997). Microeconomics of Banking. MIT Press. p. 261. ISBN 9780262061933.
  24. ^ Hortlund, Per (2007). "The Provision of Liquidity in the Swedish Note Banking System, 1878–1901" (PDF). Scandinavian Economic History Review. 5 (1): 20–40. doi:10.1080/03585520701234258. S2CID 152530914.
  25. ^ Lakomaa, Erik (2007). "Free Banking in Sweden 1830–1903: Experience and Debate" (PDF). The Quarterly Journal of Austrian Economics. 10 (2): 25–44. doi:10.1007/s12113-007-9012-4. S2CID 154076201.
  26. ^ "JiaoZi and Iron Standard – Examining world's first documented paper money system from China with lenses of Austrian economics". Rothbardian Gold Price. Archived from the original on 2015-08-29. Retrieved 2015-08-22.