THE FREE

BANKING

ALTERNATIVE

How Free Banks Promote Economic Growth

Public Commercial

Banks Firms

Savings

Bank IOUs,

Including

Banknotes

(Intermediation Costs)

Capital

(Note: Thickness of Lines Indicates Value of Flows)

RS RD

Reserves

(MV)*

Payments

Reserve and Total Spending Equilibrium under Free Banking

An Act for … for secureing certaine Recompenses and Advantages …to such Persons as shall voluntarily advance the summe of Fifteene hundred thousand pounds towards the carrying on the Warr against France.

The Bank of England Act (1694)

How Central Banking

Impedes Economic Growth

Public Commercial

Banks Firms

Savings

Bank IOUs,

Including Notes

(Intermediation Costs)

Capital

Central Bank Government

Fiat

Currency Savings Mandatory Reserves

And Vault Cash

The Price-Specie-Flow Mechanism

I have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. I have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. And yet I propose to retain that system, and only attempt to mend and palliate it.

I can only reply that I propose to retain this system because I am quite sure that it is of no manner of use proposing to alter it... You might as well, or better, try to alter the English monarchy and substitute a republic, as to alter the present constitution of the English money market, founded on the Bank of England.

Percent Deviation of GNP from Trend: Romer’s Revision