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• Preface
• Foreword
• Part One: Setting the Stage
• 1: Overview
• 2: The Evolution of a Free Banking System
• Part Two: Free Banking and Monetary Equilibrium
• 3: Credit Expansion With Constant Money Demand
• 4: Monetary Equilibrium
• 5: Changes In the Demand For Inside Money
• 6: Economic Reserve Requirements
• Part Three: Free Banking Versus Central Banking
• 7: The Dilemma of Central Banking
• 8: The Supply of Currency
• 9: Stability and Efficiency
• 10: Miscellaneous Criticisms of Free Banking
• 11: Free Banking and Monetary Reform
• Conclusion
• Notes

Co-published with the Cato Institute

To My Parents

Preface

Most economists believe that “money will not manage itself.” In this book I challenge that belief. In doing so I also try to add a few reinforcing-rods to the so-called microfoundations of monetary theory.

Like most contemporary investigators of free banking, I became interested in the subject after reading F. A. Hayek’s Denationalisation of Money (1978). The argument of that monograph, that competition in the issue of money would result in greater monetary stability and order than central banks can achieve, contradicted both traditional interpretations of history (including especially American history) and conventional theory. Challenged by Hayek, I decided to review the development of money and banking institutions in the United States. I became convinced that unwise regulations, rather than the absence of a central bank, could explain most of the shortcomings—past and present—of our monetary system. In the course of investigating this issue I was exposed to some manuscript chapters of Lawrence White’s Free Banking in Britain (1984d). One chapter described the successful performance of an unregulated banking system in 19th-century Scotland; this was further evidence against the view that past unregulated systems had failed. Another chapter presented an abbreviated theory of free banking, explaining how competition could result in a smoothly operating system of money supply. White’s study caused my interest in free banking to blossom. It also suggested the need for a more comprehensive, theoretical work—one that would evaluate free banking both as a system that might have been permitted in the past and as one that might be adopted in the future. I was eventually able to undertake this project as my doctoral dissertation for the Department of Economics at New York University. This book is a substantially revised version of that dissertation.

I am grateful to Professor White, not only for having inspired the present study, but also for helping to see it through to completion as chairman of my dissertation committee. I also owe a great intellectual debt to Kurt Schuler, whose research on free banking has uncovered many useful facts, which he has generously shared with me, and whose enthusiasm for the subject has been a constant source of encouragement. Finally, for their scholarly input I would like to thank Richard H. Timberlake, Jr., of the University of Georgia; Richard Ebeling, of the University of Dallas; and the members of my dissertation committee: Jesse Benhabib, Clive Bull, and Jonas Prager, all of New York University, and Anna J. Schwartz, of the National Bureau of Economic Research.

I have received financial support from several sources, including the Austrian Economics Program at New York University, which provided fellowship support for all of my three and one-half years at N.Y.U. I would like to thank in particular Israel M. Kirzner for his role in securing my participation in the program. The Mises Institute of Auburn University provided me a summer fellowship in 1984, and I owe thanks for this to its Director, Llewellyn Rockwell, Jr. Finally, The Institute for Humane Studies at George Mason University has assisted me by various means, including a Summer Non-Resident Fellowship Award offered to me in 1981, and an in-residence fellowship for the summer of 1985. Most of the present work was composed during the latter summer and also in the spring of 1985, when I was an employee of the Institute, and I am grateful to the staff of the Institute, and to Walter Grinder especially, for turning what might have been a painful task of composition into a pleasant undertaking.

In addition to intellectual and financial assistance I have received other help of various sorts from a number of people and institutions. I wish to thank in particular: Karen Cash and Colleen Morreta of the Center for the Study of Market Processes at George Mason University, and Mary Blackwell and Jean Berry of the George Mason Word Processing Center, for assistance in completion of the final draft of this study; Paula Jescavage, of the Interlibrary Loan Office at Bobst Memorial Library at N.Y.U., for supplying me with hundreds of obscure articles and books; and my brother, Peter Selgin, for his thoughtful editorial advice.

Finally, for their companionship and moral support, which sustained me through four difficult years of graduate work, I wish to thank my parents, Paul and Pinuccia Selgin, and my friends Mark Brady, Roy Childs, Charles Fowler, Andrea and Howie Rich, Chris Rowland, and Barbra Schwartz.