THE FREE BANKING MODEL APPLIED TO PRE‐1914 CANADIAN BANKING

Abstract

Some economists who normally prefer to rely on free market solutions to economic problems often consider money a special good that requires government control to prevent overissue. But free banking advocates take the position that the market can control the supply of money without any government imposed rule. The type of banking system envisioned by the latter school would be one in which banks would be subjected to no restrictions regarding balance sheet choices and would be allowed to charge what they want on loans and pay what the market dictated on any source of funds. Each bank would be free to issue distinctive banknotes as well as deposits redeemable into some reserve asset that banks would hold in accordance with their goal of profit maximization subject to the necessary liquidity cost. There would be no required reserve holding, no minimum amount of capital, nor any restrictions on the type of loans a bank could make, nor where they could establish branch offices. Government's only role would be to enforce contracts and to punish fraud.

Citation

WELLS, D.R. (1989), "THE FREE BANKING MODEL APPLIED TO PRE‐1914 CANADIAN BANKING", Studies in Economics and Finance, Vol. 12 No. 2, pp. 3-21. https://doi.org/10.1108/eb028682