Skip to main content

Free Banking: An Introduction

Over the next number of posts, I will be discussing the subject of 'free banking', the idea espoused by Ron Paul.  I had the privilege to be taught a graduate course on money and banking by Lawrence H. White (George Mason University), the leading exponent of free banking.  You can get Larry’s books on monetary theory and free banking here and here.

Free bankers are Austrian economists.  That doesn't mean that they are from Vienna, but it refers to the fact that the founding fathers of Austrian economics (Carl Menger, Eugen Böhm-Bawerk, Ludwig von Mises, Frederick Hayek etc.) all came from Austria.  The Austrian School emphasises methodological individualism, laissez-faire policy, the primacy of the price mechanism and economic liberty.  You can learn more about Austrian economics by clicking here.  See also a previous post on Keynes vs Hayek.

 
                

Free bankers believe that governments play no role in the money supply; rather money should be supplied by banks operating in competition with one another.  Banks in such a system would issue money backed by a commodity such as gold.  This, of course, means that there is no need for central banks.  I remember a former student stating in his Bank of England interview that he was a free banker.  Guess what?  He didn’t get the job! 

Here are some of the questions I hope to address over the next few posts:

1. Why do free bankers hold these views?
2. Has free banking been successful historically?
3. Why do we have central banks?  Do we still need them?
4. Why does government-issued or fiat money have value?
5. Would a free-banking system prevent future financial crises?

Popular posts from this blog

Bitcoin Bubble?

According to Robert Shiller , speaking at Davos, Bitcoin is a perfect example of a bubble - story here . Shiller sees Bitcoin as a backwards step in the evolution of money.   George Selgin , a free banker, takes an opposing view - click here .  Although he doesn't believe that Bitcoin is money, he sees its development as a fascinating turn in the evolution of money. In particular, he lauds the fact that Bitcoin production is constrained and cannot be infinite. There is a short video below where Bitcoin explain how it works.

How Valuable Are Connections?

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .