THE EVOLUTION OF A FREE BANKING SYSTEM

Abstract

The institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed. This paper instead provides realistic grounding for important features by constructing a logical evolutionary account of free banking. Sophisticated and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment. The emergence of standardized commodity money is followed by the development, in turn, of basic money-transfer banking, easily transferable bank liubilities, and clearinghouses. The features of an evolved free banking system differ from those assumed in recent models of competitive payments systems.