Private banking

[PJShah <pjshah@del2.vsnl.net.in>]

Sorry for the delayed participation; i was traveling in small villages.

There has been a lot of research done in the area of "free banking" or
"laissez-faire banking" since 1978 when Hayek published
"Denationalization of Money."  Larry White's book _Free Banking in
Scotland_ provided the second boost to this area of research.  Now there
are several books and scores of journal articles on the theory and
history of free banking. (My own research, when i was wearing the
academic cap, was also in this area.)

The theoretical soundness of free banking is increasingly accepted.
Historically, it has existed in Scotland, Canada, Sweden, China, USA
before the civil war, etc.  Scotland is considered to be the best
example of free banking system.  Many of the innovations came from
Scotland: interest payments on deposits, overdraft facility, currency
exchange, clearing house, etc.  Adam Smith however argued against it and
so has Milton Friedman. Well, even geniuses are allowed a couple of
mistakes!!  They both maintained that money is different from all other
economic goods.

Hong Kong's currency board system is not really free banking but comes
close to it.  The issue of currency is limited to two banks, Hongkong
Bank and Standard Chartered.  No open entry--against the principle of
free banking.  (Bank of China doesn't issue currency.)

I think free banking will be a far better system for all, including
India.  Money is just like any other good and it should be left to the
market to produce and regulate.

parth-

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