How do alternative (or Free Banking) systems work?

Free banking has been introduced by the Austrian School. Austrian economics have been promoted by the Austrian economists, such as: Carl Menger, Ludwig von Mises and Frederick Hayek. The question is: are Austrians right that we should have free banking? Or should we rather have “right” banking regulation?

Free banking has number of historical examples, both successful and disastrous. Such banking system in Australia seems to be an example of the most unsuccessful experiment. Hickson and Turner suggest that the success of free banking largely depends on whether bank shareholder have limited or unlimited liability (where systems with unlimited liabilities tend to be more stable). However, no matter if the Free Banking experiment was successful or not, by now, all the countries have converged to regulated banking.

Banking regulation is the intervention of government into banking system, and generating money with the help of central bank. As we know, government is “taxes”, and “taxes” is money, therefore it is hard to imagine a stable and powerful government without the control of money.

Monetary policy plays an important role in economy.  Poor monetary policy of the US president Hoover, in the beginning of 1930’s, has deepened the recession. Hoover’s administration had simply “locked the gold in a cell” without supplying adequate amount of cash. Roosevelt, on the other hand, did the opposite. He abandoned the gold standard and used quantitative easing to boost the economic recovery. The above example shows how powerful monetary policy is, and how crucial are the right decisions.


In today's "mostly democratic" world, governments act (or at least are supposed to act) in the interest of country citizens. Whereby giving the monetary control to the private banks, it is hard to imagine bankers beings interested in the public good.