What Is Free Banking, and Why Should I Care? | Learn Liberty


Ordinary debates about monetary and banking policy take it for granted that a government central bank like the Federal Reserve System will continue to provide money and that government regulators will continue to limit what banks may do in the payment system. Here I don’t want to take that for granted. I want to help you think about the idea of free banking: a system where we replace the central bank with competitive firms in free markets that provide the full range of monetary and banking services. We have to go outside the box as they say to think about the consequences of allowing private banks to issue money unrestrictedly and having a monetary system without a government central bank. Fortunately this isn’t social science fiction. We can draw on a rich history of free banking experiences. The successful free banking system of Scotland before 1844 is a leading illustration of the results of minimizing government restrictions on banking and money issue. But we can also look at New England before the U.S. Civil War, Canada before the First World War, and more than 50 other places where money was issued by competing private banks subject to minimal restrictions. In historical free banking systems the basic money was gold or silver coin. The coins could be privately minted, though governments usually monopolized the minting industry. Banks issued currency notes and checkable accounts denominated in standard coin and redeemable for it. To attract customers each Bank tried hard to make its notes and cheques accepted at 100 cents on the dollar everywhere its customers went. Because people wouldn’t want to carry a money that fell to a discount or fluctuated in value, trustworthy bankers made agreements with one another: if you accept my notes at face value I’ll accept yours at face value. As a result banknotes became interchangeable and retailers had no more trouble dealing with many brands of banknotes than they have today dealing with checks written on many banks. Private banknotes proved more reliable over the years than government banknotes. Unlike a sovereign issuer that can devalue its own currency if it so chooses or quit redeeming it entirely, no private bank can renounce its contractual obligation to redeem in full and get away with it in a court of law. And unlike a bank with a government-sheltered monopoly no private bank in a free banking system can attract customers if it undertakes risky strategies like holding inadequate reserves or making risky investments that would make the public worry about its reliability. Each Bank has its reputation to protect in a system where its customers can easily turn elsewhere for money in banking services. So here’s the takeaway: money is not an exception to the rule that a free market is the most efficient system for providing goods and services. Free banking worked well. Central banks like the Fed did not come on the scene because of any free market failure to achieve efficiency. In many countries the government created a central bank in order to have an institution willing and able to lend it money on easy terms. Today the pressure continues on central banks to print money to pay the government’s bills. As the failures of central banking systems continue to mount, the alternative of free banking deserves our reconsideration

89 thoughts on “What Is Free Banking, and Why Should I Care? | Learn Liberty

  • I love this channel, but this video completely ignored the negatives of a free banking system, and didn't include any of the positives of a centralized bank except for a footnote at the end about lending money. 

    I expect better from this channel. If I wanted a biased viewpoint that ignores cons, I would just Watch Mainstream news station. 

  • Yes, we need separation of bank and state (and school and state, and healthcare and state, and fire protection and state, and…)

  • Shire Silver's card model eliminates the need for bank notes by making gold and silver as easy to use as paper. Combine that with the use of bitcoins and we certainly don't need government money.

  • Bitcoin (or more broadly, cryptocurrency) has the big advantage of not merely being linked to a separate store of value, like currency 'backed' by a commodity is, but instead being the actual source store of value.  The 'link' to separate commodities itself is what was/is manipulated by our government/central bankers in order to steal value from Dollars.  

    Also, it's specifically the nature defying characteristics of Gold (and other precious metals) that resulted in widespread adoption as a store of value; scarcity, divisibility, and durability are relatively very unnatural characteristics of commodities, hence the use of precious metals overcame many of the natural limitations of using a commodity as money.  Cryptocurrencies (or 'precious bits') possess these same characteristics, but to an exponentially greater degree. 🙂

  • Question: If I have private notes issued by Bank Y, who engages in bad practices and goes under, why would Bank X honor those notes? I understand a contractual obligation to honor them, but if doing so jeopardizes Bank X, and Banky Y might be considered in breech of contract, where is the incentive to honor Bank Y's notes?

  • Fabulous video, I wish everyone would watch and learn the power of freedom and it's ability to increase a standard of living vs the govt's ability to lower it. History is crystal clear.

  • I dont like the argument that central bank today are still a tool of goverment debt reduction. This is simply not really true anymore. Sure there is potential that this can happen, but today we dont observe this in the first world.

  • inb4 smart pants. Free banking systems do have weaknesses as well. It's just that these weaknesses are much better option than Fed's bond buying program.
    Banks do make mistakes and individuals find loopholes that result in more notes than actual bullions in the vault. But It's still way better than the current centralized system where a failure of Fed means collapse of entire system.
    If it's difficult for private banks to properly track down currency flow, it's only even more so for government.
    Which is why some people suggest multiple currencies competing; individuals can carry different currencies and their loss will be minimized even if one of them fails.

  • People wouldn't put their money into banks that make risky investments? Oh really? So how did the banks get into the mess they're in now? And anyway, this kind of freedom relies on a very well informed population, and since that would also be 'free' there's nothing to stop the banks buying the media. So where should the reliable information come from. Freedom from government is just a fire sale of all the rights we've fought for since universal sufferage.

  • With this "philosophy" is a constant effort to say that individuals justly consider their impact on any portion of society as they indiscriminately appease their baser desires. It's ridiculous to pretend there isn't an incentive to screw people.

    Replace the fed with multiple crappy feds? This is already an issue. Each one can act more shady than the next because their negative effects won't be as far-reaching while they all race to the next crash and we prop them up all the way.

    Legal obligation? When did that happen?! "Reputations to protect"; that's rich.

    We already have a treasury. There is no practical monetary purpose for precious metals. If your imagination makes them work, make money work instead. Otherwise you can go trade on craigslist or sell your graven images for actual money.

  • Do people take time to think about the video and its connotations and apply a modicum of nuance when responding? It is very aggravating to read some of the knee jerk reactions to this video. Also most of these videos are not a one stop shop to solve the worlds problems and would slowly get implemented even if considered viable.

  • These videos are great, and I do think that education is the best way to address these issues.
    But in the short term I think it would be more advantageous to get someone responsible into the Fed & put pressure on them to tighten its policy.
    The majority of people still see it as Govenrment's role to fix these issues, and that won't change overnight.
    I'm not in disagreement here, I just think the priorities & steps towards a more accountable society need to be chosen carefully

  • We have to look into all resources. Not just base the currency value on one or two metals. If the country has oil, gold, coal, technology, knowledge its all worth so much more then money. Honestly money is the one thing holding us back. People with great knowledge can't make their ideas come to life without it. So they get a job that wastes their intelligence until the only thing they know how to do is that service job. Even if that great idea is a life changing idea for all, the people currently holding the money won't let it happen because it would dwindle their fortune. Some people are so poor all they have is money. 

    Think of the earth, the people, the children, the great things we could do together if it wasn't for money (our ball and chain) holding us back. Without money and jobs we could all study and learn much more. In my economy you would only have to grow and be happy. Not suffer. 

  • I am sorry but this is not how to pitch for "Free Banking". It may sound good to people who are not well informed about the banking system, but to people who are more informed, this is no way to get out of the current crisis. Unless, of course, you are suggesting a total collapse of the financial system of the U.S and chaos to the world. 

  • so free banking only works with a gold-standard? – with no hook on the currency it would just be even more fiat-currency

  • Ahh so that is why there are three banks that produce banknotes in Scotland, but only one in England. A legacy from Free Banking, 150 years ago.
    Unless Bank of Scotland or Clyde Bank stopped printing notes since the GFC?

  • This is going to sound snarky, but I mean it as sincere constructive criticism.  The music in this video is annoying and unnecessary.  I kept checking to see if another video was playing at the same time.

  • Do you have a video about the argument that says: "a lender of last resort is necessary". I want an explanation for the failure that allowed them to sell us the idea of the lender of last resort. 

  • what about just limiting the debt a government can take to some amount and then putting it in the constitution. and if that limit is reached there will automatic re-election called and then if within a 2 year the debt is not bought under the percetage of gdp written in constituion then there is automatic cut in spending and increase in taxes. this i believe would be simpler than giving power to bank and we know they will always take risks to increase profits as off the pressure from share holders

  • This doesn't take into account the damaging effects that the profit motive manifests in a monetary system, nor does it address cybernated automation which is currently displacing workers worldwide including the former catch-all sector, the service industry.  Money is outdated and we should be talking about a moneyless global resource-based economy.

  • Good video, we do need a discussion on alternative methods of Banking, especially Central Banks, and a real monetary system that works for the people and not just for the money interest. However, the part here about unregulated Free Banking is of concern, if people can still trust the Bankers this far into the New American Depression, that would or should be a miracle. One things for sure, anyone connected to Banks offering their solutions to our present predicament of the Transfer of Wealth, should be overlooked, as you can be sure they have their agenda which is not going to be a good thing, and that's an historical proven fact.

  • Great video with a calm and rational presentation (as always). Sometimes the message and the lesson is lost in the debate due to strong emotion on the part of the anti-Fed side.  
    It's important to emphasize (and you do) that contract law and regulation still exist in a system without a central bank. It's not as if things become a wild west, in a "mean world" where the consumer will be run roughshod by evil bankers. Often in the debate, business is presumed to be "more evil than good" with the government as the "good and fair defender".  
    Whether the central bank is present or not, property rights and contract law still exist, and a clear and simple explanation of those & how they protect the customer can help gain support for the concept.
    A central bank doesn't know you or owe you, on an individual level, and therefore doesn't "care" what their policies do to any individual. Their concern is on the macro level, where you're just part of an equation. A small local bank or credit union, on the other hand, obviously does care about you as a customer. Which is preferable? 🙂 

  • Not so sure about this idea although it is intriguing. I agree that competition will limit how much risk the banks take in since it is within their interest to do so. I dont agree with his other points. Also I was under the impression that central banks were created because back then you couldnt go to another bank and deposit your hard earned money because they only printed their own money and dont accept money printed by other banks. Wasnt that the case? Nice thought provoking vid.

  • The fed IS PRIVATE! It gained it's monopoly from all the others. Notice how he says before war X. Well what do you suppose war X was for? Also free market does not equal free people, quite the opposite and China is irrefutable proof of this. What a shyster.

  • Here's a good link about the history of free banking…

    http://menghusblog.files.wordpress.com/2012/02/the-experience-of-free-banking.pdf

  • Correct me if I'm wrong, but wouldn't this require a material standard of some kind?

    I am all for the FED. Only thing is, the FED should be Federal. Creating currency is a very large function of American currency's integrity. Why wouldn't it be run by the government 100 percent? We need a FED that doesn't inflate our currency so damn much. Banks having special privilege for capital (specifically to issue money that doesn't yet exist and charge interest for the trouble [even though the bank didn't own nor earn the money to begin with]). That's a problem. If the bank can do that, why can't the average American person? I want to take out a loan directly with the FED, but the FED benefits banks exclusively.

  • Uh, if you don't like one central banking system, you can always choose another.

    And free markets ARE very efficient, but its always efficient at profit, generating concentrations of wealth from the many to the few and to hell with anything else.

    Controls are needed to make it LESS efficient because a "Free" market is going to be great to the ones on top, and pretty horrible for eveyone else.

  • Is there a single libertarian who isn't chronically naive?

    "Golly gee willikers, a state ruled by the citizens is better than an oligarchy! Abracadabra, problem solved!"

    Yeah, you'd have to ask 1/4 million dead Southerners about that. 
    Until they realize that we are slaves to an illegal empire, they'll keep on chasing that wild goose, and baking freedom-pie in the sky.

  • Money is Not a commodity. Gold Silver Wheat and Bacon are. There is nothng FREE about your Banking. Get BACK under your rock.

  • I'm all for economic freedom, however, the banking issue is where I have strong disagreements with libertarians. Firstly, Gold was used as a base for currency to prevent the currency from being devalued by excessive printing but it doesn't seem like it worked since we abandoned since banks printed money anyway. A few things about the gold standard:
    1-The financial institutions hold most of it
    2- Why simply not print money instead of digging up the earth to base the currency on a piece of rock. What this means is, have a legal amount per month that a country is allowed to print per month (set by law). This money should be used to invest in infrastructure or things to benefit the general public. Or – as some would contend don't print so that we experience deflation and people's money appreciates over time instead of depreciating. [Deflation is controversial, but debatable]

    Secondly, fractional reserve is pure FRAUD! There is no other way to describe it. What I find most amusing is in economics, Keynesian people say you shouldn't mess with the fractional reserve and let the market decide it (KEYNES OF ALL PEOPLE, he's basically a commie for the amount of government intervention he proposes, anyways…) So the fractional reserve must be 1. Banks must loan only what they have. This prevents inflation because the money supply is not expanded.

    Finally, the last point I'd like to make is one which I still have to study more. But there seems to be some positive evidence suggesting that the abolition of interest is beneficial to the economy.There can be other ways of financing through equity. Remember that if there is no usury people don't earn interest in their bank account (which is miserable and usually equal or below inflation) and they have incentive to become investors on their own accord. People will more or less be 'punished' for leaving money idly and be encouraged to invest. This would be very beneficial for business. 

  • One question. How do you regulate inflation if these banks can create money? Or can they only do that through loans based on reserves. Would the reserves be in gold?

  • Yeah, but you did't said that in terms banks create money out of the promises of the lender to pay. You suggest free market, but if anyone could create money that he/she does not own initially, would not everyone try to be a bank?

  • First, I have question to anyone who cares to answer:
    Why don't private entities issue their own currencies today?  Is it illegal to do that?  Is it just not profitable to do? Are people more or less ok with normal currency, so no one puts in the effort?  Or is it because it's really expensive to buy a bunch of gold to back your currency and then convince everyone to use it?

    Then a comment:
    It seems that one good thing about fiat money is that nobody has to hold a pile of gold in one place just for the sake of guaranteeing an issued currency.  This would be a lot of expensive gold being purchased and left in a vault somewhere, an action which doesn't seem to have any utility.  The government itself, and all of the buildings and trucks and things that the government would buy anyway for various purposes, are essentially what gets used as collateral for fiat money.  

  • So instead of one giant counterfeiting organization, we should break it up into a lot of little ones??

    This is hardly a solution. A TRULY free bank would have to offer money OF VALUE since it would not have a government to enforce its use. More fiat pieces of paper aren't going to solve anything.

  • the problem is not what system of banking you use or whatever it is people, the nature of people to try and monopolize their product or service to use resources to oppress competition or others, to undercut a competitor to basically be a creep who is more concerned about their profit and power then in right or wrong or fair or unfair. if government officials were angels the fed system would work because they wouldnot borrow more than they actually need,they would not create dept that waste money and resources they would not force people to use their fiat, they would not give out favors, allow money or favors to blind them or pervert their judgement in passing laws and they would not allow inflationary printing. so the problem is not what system of something but of those who run it, people are the problem. we are all the problem, we are sinful humans who seek selfish pursuits regardless of who these pursuits hurt or damage (even if the damage may not be apperant at first) you have to be a person of integrity to solve the problems we have and no one of integrity can hold power without being corrupted by it. very rare indeed is the individual who cannot be corrupted either by bribes or threats. you see man cannot rule over himself without devine direction but most people refuse to see it or acknowledge that because they feel that true independence will bring freedom and peace but it never does, everyone thinks if we just change the system, the rules of the game it will work but it never does true freedom will never be gained by changing the rules, you have to change people and that change requires devine intervention. and being free moral agents not everyone wants to change.

  • It already exist through different channel. Talk to Dr. Robert Murphy, he wrote "How Privatized Banking Really Work"

  • Just a thought: What if a banks lie about how well they're doing, so other banks think their bank notes are acceptable even though they're really risky assets?

  • I agree that free banking would be the ideal. The counter argument is without a central bank, there is no lender of last resort. I personally don't have a problem with that, but the economic ignoranti will believe that they will exposed to unnecessary risks, when in fact I believe the opposite would be true. 

  • Economics and state must be separated for the same reason that church and state must be separated.

  • Thank you! Very much appreciated. It's good to know that there is always an alternative which can make you freer, even in the topic of banking! I didn't even imagined so! Continue with your videos, they are pretty helpfull and understandable

  • @learn liberty : how viable is this system in terms of scrutinizing for fake bank notes, when there are multiple bank notes. I guess it must be very easy to print fake bank notes in such a scenario. Any answer would be highly appreciated. Thank you

  • With todays technology Free Banking makes even more sense, because of how easy it would be to convert one currency with another.

  • I have two questions how do private banks profit by issuing money and is it possible for an economy to have a complete private currency structure without the government issued money?

  • Well I agree on many things in your Videos but the Idea of going back to the gold standard is ridiculous! Why should you limit your economy on the supply on a metal which can’t be used for other services otherwise on your system the fractional reserve rate would be so low that all the banks will fail. I am not saying that our current system is better, of course not, it is horrible and also flawed. But there are alternatives based on mathematics or private institutions, which rate the economy and these could be used in Cryptocurrencies (I am not saying Bitcoin is good, it is really bad and can’t be used as money, but I hope some day we will find an alternative.) In fact I want to study Mathematics to think about ways to let the system regulate its money supply maybe based on good-exchanges or other factors. So I hope that maybe Maths knows the answer not only to Banking-Sacurity like Cryptocurrencies currently does, but also to the fundamental banking system.

  • What we need is a central value of money like Gold. Man made inflation rates and interest on money is the biggest financial terrorism caused by banks.

  • Bad video, you do not understand how the US monetary system works. The federal reserve is an over-glorified inter-bank clearing house, and neither the Federal Reserve nor the US dept of Treasury print MONEY; the treasury prints physical currency, but it is always offset by an equal reduction in non-physical money.

    The USA has one of the most privatized monetary systems in the world, and overall it works REALLY well. I'm very libertarian leaning to the point of ideologically being an anarchist, but the Federal Reserve is actually a really good system. Now FISCAL policy, that's a whole heap of problems.

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