THE THEORY OF FREE BANKING

Abstract

This papers analyses three theoretical propositions about the theory of free banking. The first one defends the operation of an interbank dearing medianism checks oversissue by an individual bank. The second proposition assures that private issuers in a competitive system have incentives to establish confidence in the value of the moneys they produce and in the quantity they can safely emit. The third proposition said that restriction of discounting by banks to real bills limits the quantity of money they issue and it is only legal restrictions that account for the absence of private currency issues, which are demonstrably efficient The conclusion of the text says that if the free banking system were adopted, bank failures would occur Finally, the author proposes a set of precautions to be imposed on owners and managers that would give them the incentive to be prudent in making loans and investments on penalty of losing their equity and management jobs.