Most interpretations of American free banking experiences in the nineteenth century focus on the failure of what is commonly believed to have been an experiment in unregulated banking. In this dissertation completed in 1988, economist Karen Y. Palasek advances the thesis that not only was free banking a strictly regulated system, but the reasons for its failure stem directly from the regulations themselves and from the regulatory ties between bond collateral requirements for competitively issued redeemable banknotes and a large volume of government debt which was essentially used as a reserve by free banks.
To illustrate the impediments presented by free banking laws, Palasek compares free banking experiences in New York to bank experiences in New England under the Suffolk System. She argues that the New England regional banking system that developed under the Suffolk was essentially a laissez-faire banking system, producing stability and safety for noteholders and depositors through market-driven behavioral constraints on the banks. New York, arguably the best example of American free banking, compares unfavorably on both stability and safety to the more laissez-faire system. The implications of this reexamination of free banking and the recent debates over the causes of instability in the free banking era have a bearing on modern reconsideration of deregulation and the self-regulating properties of a laissez-faire monetary system in the areas of stability, safety, and adequacy of banking facilities.
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Dr. Palasek is the Director of Educational and Academic Programs at the John Locke Foundation.
The amazing fact is that the great majority of British people are not yet consciously aware that they are living in a very severe economic crisis.
