Laissez-faire Banking.

• Author: Jackson, W.E., III

A generation or so ago most "mainstream" economists would have dismissed laissez-faire (or free) banking as a radical idea at best and more likely labeled it obvious nonsense. Even today many find the major ideas of free banking to be rather mysterious. However, more recently the main ideas of free banking are enjoying a rather remarkable renaissance; to a large extent the current book by Dowd will continue to fuel this revival. As Dowd points out in the excellent introduction to the book, free banking is a novel idea that challenges too much of what most people still take for granted; that is, (1) that banking is inherently unstable, (2) that the banking system needs a lender of last resort or deposit insurance to prevent system collapse, and (3) that the government has to (or is able to) protect the value of the currency to insure stable long-run growth. Dowd demonstrates that each of these assumptions contains major flaws.

The argument for free banking is very simple. If markets are generally better at allocating resources than governments, then what is so different about money or (the industry that produces it) banking.? Dowd's book does a convincing job of casting suspicion on most traditional answers to the above question.

Dowd's book is actually a collection of recent essays on free banking. These essays are presented as separate chapters that can be classified into one of three categories. The first category (Part I) deals with the theoretical issues raised by the free banking debate. This includes chapters 2 through 6. The second category (Part II) features the historical evidence on free banking. Several revealing historical episodes of successful free banking are presented in chapters 7-11, with chapter 12 reserved as a demonstration of how the major issues in the free banking debate have sometimes been side stepped by Dowd's critics. An eclectic selection of monetary and banking reform issues is addressed in chapters 13 through 16 (Part III).

Overall, this collection of high quality essays by Dowd is essential reading for students of banking and monetary policy alike. It is worthwhile to briefly discuss or summarize each chapter here.

Chapter 2 uses the Mengerian "invisible hand" process to describe how a free banking system "might" develop from a primitive economy. It is quite illustrative and suggests that a free banking system would have three distinct features. First, it would feature multiple note issuers who issued...