Free banking refers to banking without government deposit insurance or a lender of last resort and free of legal restrictions on interest rates, bank portfolios, branch banking, and, most interestingly, private and competitive note (currency) issuance. The most general and fundamental question addressed by free-banking theory is, how would a monetary and banking system operate under laissez faire? An answer to this question is essential for a proper, critical understanding of the effects of government intervention in the monetary system. Just as it would be impossible to understand the full implications of restrictive tariff policies without reference to a theory of free trade, so to is it impossible to understand the full implications of legal restrictions in banking without reference to a theory of free banking--an understanding that is crucial both to understanding monetary history and to making predictions concerning the likely consequences of future deregulation and financial innovations. Surprisingly, monetary economists did not begin to construct such a theory until the mid 1970s, and there is still much work to be done.

Interest in free banking increased during the 70s owing to the perceived shortcomings of monetary regulations (including central bank behavior) and also thanks to studies of the pre-Civil War U.S. "free banking era" by Hugh Rockoff, Arthur Rolnick, and Warren Weber, showing that that regime was far more successful than had previously been supposed.

The U.S. "free banking" episode was, nevertheless, far removed from genuine monetary laissez faire. A closer approximation was the Scottish free banking era, which ended in 1845 and was the subject of Lawrence H. White's 1984 book, Free Banking in Britain. Since 1984, numerous other free-banking episodes have been uncovered and examined. My article, "Free Banking in Foochow" (in Kevin Dowd's volume, The Experience of Free Banking) examines one of many Chinese cities that had free banking systems until the early decades of the twentieth century.

My main interest has been in the general, theoretical implications of monetary deregulation. My 1987 Economic Inquiry article (with Lawrence White) on "The Evolution of a Free Banking System" offers a partly conjectural history of how banking institutions evolve under laissez faire. Such a conjectural history serves to motivate assumptions about the structure of a free-banking system. My 1988 book, The Theory of Free Banking, and my 1994 Economic Journal article "Free Banking and Monetary Control" (JSTOR link) explore the determinants of the supply of bank money under free banking. My Cato Journal article, "Legal Restrictions, Financial Weakening, and the Lender of Last Resort" and my 1994 Critical Review article, "Are Banking Crises Free Market Phenomena?" dispute the claim that banking panics are a problem inherent to fractional reserve banking, and propose a "legal restrictions" alternative the the conventional theory of banking panics. My article, "In Defense of Bank Suspension," for the Journal of Financial Services Research, argues (contra. Diamond and Dybvig) that, in the rare event of a general run on a free banking system, solvent banks could protect themselves without harming their customers by exercizing a contractual right to suspend payments. Finally, my and Lawrence White's 1994 Journal of Economic Literature article, "How Would the Invisible Hand Handle Money?" (JSTOR link) surveys pre-1994 writings on monetary laissez faire. This article as well as most of the other articles mentioned above are gathered, with an introduction, in my 1996 book, Bank Deregulation and Monetary Order. (Check my C.V. for details, including the locations of individual articles.)

While my research treats fractional-reserve banking as a potentially stable and largely beneficial market-based institutional arrangement, some (though not all) self-styled "Austrian" economists claim that it is both inherently fraudulent and inherently inflationary. I respond to some of their arguments in my Independent Review article "Should We Let Banks Create Money?"

The claim that monetary systems can function smoothly in the absence of government regulations sometimes raises the question, Why do governments intervene in money? Although economic misunderstanding and pressure from special interests within the banking industry account for many observed forms of intervention, Lawrence White and I suggest, in our 1999 Economic Inquiry paper, "A Fiscal Theory of Government's Role in Money", that government intervention in the money industry has largely been a result of fiscal pressures to extract revenue from money holders.

Here is an interview I did on free banking for the Richmond Fed's Region Focus magazine, and here is a podcast from Russ Robert's EconTalk.