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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?

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