Local Currency Free Banking

Local Currency Free Banking

Free banking refers to the economic system where banks set up shop in the same way that any other business starts, free from a great deal of government regulation.

In free banking, a businessman has the freedom to form a bank, issue notes, accept money in deposit, pay checks for customers, collect checks on deposit, borrow and lend money, invest, provide guarantees, letters of credit and so on.

The term Free Banking is used in contrast to central banking, where the government founds or supports a central bank.

In the absence of such a government-backed bank, banks all have the same rights, but also the same responsibilities as any other business enterprises.  They would be dissolved if they failed to meet their obligations, and would not have the right to call on the government for aid if they failed to make wise business choices.

A central, or government supported, bank would be able to fall back on the government to protect itself from any unwise activity, ill-advised investments, etc.

In a free banking system, there is no central currency or national currency. The national government can insist that taxes and official bills be paid in a particular currency, perhaps a state currency.

While there may be a central bank in a free banking system, it will not determine interest rates, fractional reserve ratios or a national currency. It can issue the currency required for taxes.
Banks accept the notes of other banks and will redeem the notes from other banks, develop a short term credit market, and invest in marketable debt securities.

Many countries have had periods of time where free banking practices were in place; in the United States, the period was between 1837 and 1862; in Scotland, it fell between 1716 and 1845.

In no country has this system persisted as the means of operating financial interactions.