Can free banking argument successfully stand on past examples?

From the ideas which are supporting the free banking, it is easy to see that all the arguments stated base on the past examples. We also know those examples truly succeed during a certain period. But what happened after the glory days?

Scotland

From White (1984), for the whole 18^th and early 19^th centuries, free banking system in Scotland was stable. There are no central banks, openly entry the market and little restriction on money-issuing. Also through the comparison between the performance of Scottish banks and England banks, it stated that “banks would spring up if government had let banking alone”.

However, Sechrest and Larry (1991) found several deficiencies of White’s idea. First of all, it is true that from 1809 to 1830, less bank failures in Scotland than that in England. But in the later part of this period, banks failures in Scotland increased dramatically and finally have the same failure rate with banks in England. Secondly, better convertibility in Scotland is not true. In the later time of free banking period, it became hard to transfer notes to gold. What is more, the law of no issuing money less than one pound was actually made market result in inflation. Moreover, it set a maximum interest rate in Scotland that not only restricted bank competition, but also always be lower than market interest rate. Finally, White doesn’t like central bank and advocates free competition in banking, but there were actually there banks with special power at that time, made the competition unfair.

As a conclusion, banking in Scotland, as the best free banking example, had many aspects need to be corrected and is not that free.

Australia

What happened in Australia before 1893 could surly support free banking, unfortunately, it fell in crisis in 1893.

Before the crisis, there was a fast price increasing of real estate, this finally formed a bubble and led many banks fail. Some of them survived because of the fund supply from Britain and elsewhere. Then the crisis came.

Three points were concluded for Australia’s failure:

1, less liquidity reserves for more depositors

2, banks over expansion

3, Government influence the market negatively (lately engage banks to take over risk).

Regard to the problem, it argued that if the note issue was limited and a credit system was provided, etc. the crisis could be avoided.(more information in Hickson and Turner in 2002).

Therefore, in the case of Australia, we can say the crisis is mainly because of the lack of government support and regulating.

Free banking ideas are stand on past examples, however, with the information provided above, it is reasonable to say that the supporting ideas of free banking are not solid and regulation might be necessary for banking syatem!