Free Banking Era

Abstract

In the free banking era entry into banking was virtually unrestrained, banks could issue their own currency and governments did not insure banks; many banks closed and many noteholders reportedly suffered. An early view of this period is that free entry led to banks over-issuing notes, resulting in large losses for noteholders. More recent research has shown that this is incorrect. Although such failures and losses did occur, these were generally due to the capital losses banks suffered when the prices of the state bonds backing their notes fell, rather than to note over-issuance or fraudulent banking practices.