All influential economic theories surely pass through four stages. Initially, the new idea is treated with skepticism, perhaps even with scorn. It strikes many theorists as being outlandish or irrelevant. A few, however, think they perceive something of value. They are challenged and excited by the prospect of exploring new territory. Thus the second stage is born. A variety of researchers begin to investigate, interpret, and modify the idea. It becomes, in short, a viable research topic.

The body of conventional literature on monetary matters has, for many years, included several propositions that explicitly challenge the viability and/or desirability of free banking. Chapters 2, 3, and 4 presented a detailed theoretical case for free banking on the grounds that it would maintain nominal national income, reflect consumer preferences in the time and money markets, keep the market rate of interest equal to the natural rate, achieve continuous monetary equilibrium, and avoid business cycles.

This book has had two basic goals: (1) to summarize and critique some of the more important theoretical and empirical research on free banking, and (2) to present some of the author’s own thoughts on the theory and history of free banking. One hopes that the former has been accomplished in a manner that is both fair to those other researchers at the same time that it offers a clear and insightful exposition to the reader. As for the latter, all writers aim for a presentation that is persuasive. This writer is no exception.

The specification of the model takes the following forms:
Implicitly,

MD = MD(P;k,y)

         MS = MS(P;S,k,Ps,y)

   Y= Y(P;y)  

Explicitly,

MD = aP + by + ck(1)

MS = eS + fk − gPs− hP − jy(2)

Y= Py(3)

where

Ames, Edward. 1959. Trends, cycles, and stagnation in U.S. manufacturing since 1860. Oxford Economic Papers 11 (October): 270–81.

Anderson, Benjamin M. 1979. Economics and the public welfare: A financial and economic history of the United States, 1914–1946. New York: Van Nostrand, 1949; reprint, Indianapolis: Liberty Press (page references are to reprint edition).

Ashton, T. S. 1969. The industrial revolution: 1760–1830. London: Oxford University Press.

Adverse clearings, 7, 14, 15, 68, 75, 144

Aldrich-Vreeland Act, 137

Architectural metaphor, 175–76

Austrians: business cycle theory, 53–56, 58 nn.22, 24, 155 n.8, 156 n.13; characteristics, 42 n.5, 58 n.19; free banking, 18, 144–50, 155 n.6

Bank Charter Act of 1844, 82

Bank failures: Canada, 138; capital adequacy, 169, 173 n.14; option clauses, 171; Rothbard, 145–46; Scotland, 81, 83–85; United States, 95–101, 103–4, 137–38

LARRY J. SECHREST is Director of the Free Enterprise Institute and Assistant Professor of Economics in the Department of Business Administration at Sul Ross State University. He is an Adjunct Scholar of the Ludwig von Mises Institute as well as a former Fellow of both the Mises Institute and the Institute for Humane Studies.

IS THE MARKET A TEST OF
TRUTH AND BEAUTY?