The 'banking is too important to be left to the private sector' argument is weak because almost everything important (trade, food, agriculture) is left to markets; the real question is whether government involvement makes the sector work better.

In the Scottish free banking system until 1845, total losses suffered by banknote holders were miniscule compared to the losses borne mostly by taxpayers from bank failures in modern central-banking times.

Because National Bank notes had to be backed by government securities, as the government retired its post-Civil War debt it became exceedingly costly to supply currency, so the currency supply shrank even as the country grew rapidly, causing severe currency shortages and financial crises in the late 19th and early 20th centuries.

In free banking, a private clearinghouse acts as a banker's club that detects banks lending too aggressively before the public does, expelling them and prompting other banks to refuse their notes—as happened to the Ayr Bank in Adam Smith's day, which collapsed quickly with losses borne mainly by its shareholders.

Under competitive note issuance, an individual bank that over-issues faces a reserve drain: notes it issues are received and returned for redemption by rival banks, draining its reserves, which strictly limits how much currency any single bank can create—the same discipline that constrains deposit creation today via check-clearing.

The right policy is to stabilize aggregate demand (total spending PY) while letting the price level fall when productivity improves and rise when it falls, because an improvement in productivity is a change in the relative price of output to input—so forcing a stable output price level requires inflating input prices, whereas letting output prices decline is better.

Gresham's law ('bad money drives out good') applies only where government has monopolized coinage and uses legal-tender laws to force inferior coins to circulate at par with superior ones; in a free market with no legal-tender laws merchants can price in or refuse bad coins, so the opposite prevails—good money drives out bad.

Claims that central banks have 'gotten the hang of it' based on roughly a decade of moderate cycles ignore the many decades central banks screwed things up and amount to cherry-picking the sample period; the current crisis shows that apparent stability was setting the stage for another cycle.

The belief that a good banking system is one where customers never face losses is fundamentally rotten; allowing banks to fail and customers to take losses is necessary, because removing that risk leads eventually to a system dominated by lousy banks.

Legal-tender enforcement of debased money is a prisoner's dilemma whose equilibrium outcome is the circulation of bad money, as shown by French Revolution assignat laws that made it illegal for a merchant to ask which kind of money he would be paid before making a deal.

The Scottish 'option clause' let banks suspend note redemption while paying note holders the maximum legal 5% interest during suspension, converting the note into a small bond; it developed to defend against rival banks staging note 'raids,' and was an incentive-compatible device never actually used against customer runs.

A bank not subject to reserve requirements and able to supply both currency and deposits can expand more the more slowly people spend its money; in the limiting case where nobody ever writes checks, a bank could expand forever because it would never lose reserves.

With free banking today you would not need an activist Fed, because the private banks can supply adequate amounts of every component of the money supply; the Fed's leverage rests only on its monopoly of paper currency and bank reserves, which becomes unnecessary if banks can freely issue notes and the monetary base (reserves) is simply frozen.

Private coiners (such as Thomas Williams) issued copper coins that were initially heavier than Royal Mint equivalents, beautifully engraved to defeat counterfeiting, and redeemable on demand to balance supply and demand—producing money superior in all respects to the Royal Mint's and, via about 20 mints serving 200 issuers, solving the coin shortage.

Free banking means banking conducted without special regulations, treated like any other industry producing real goods, requiring no special government role beyond ordinary contract enforcement, especially under a commodity monetary base like a gold standard.

Government interference with money and banking long predates the Federal Reserve and other central banks; the U.S. government wielded a heavy hand in banking well before 1913.

Banks in a free banking system can do everything central banks/governments do in the monetary system except contribute to crises, which government agencies are particularly good at doing.

Two specific pre-Fed regulations—the lack of branch banking (forcing single-office unit banks) and heavy restrictions on banks' ability to issue currency—caused much of the financial chaos that later served as the rationale for creating the Fed.

Historically, under free banking, different banks issued notes with their own names but all represented claims to the same underlying gold standard, creating a uniform monetary standard without a monopoly issuer of paper money.

U.S. banks lost their right to issue notes in two Civil War stages: state banks were taxed out of note issuance, while federally chartered National Banks could only issue notes if backed more than fully by U.S. government securities—a design meant to finance the war, not to improve the monetary system.