During the early 1800s, banks printed their own notes as a convenient representation for the gold, silver and other assets held by the bank. Depositors monitored their bank. The value of the notes varied as function of the reputation of the bank. The notes of poorly run banks were discounted relative to the notes of well run banks when the notes were exchanged. Bad banks were thereby driven out of business by good banks.

This self-regulating system worked well except for one flaw: States refused to license more than one branch. Consequently, when a crop or mine failed in a region, demands made on the bank of that region sometimes exceeded its reserves. Unable to borrow from a sister bank, the bank failed, exacerbating the economic problems for the region. Free banking can work if geographic diversification is not constrained.

Terminating the central bank (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC), and deregulating all banks will result in a stable source of credit to facilitate economic growth. With their own wealth at stake with the credibility of the bank, free bankers will be prudent with bank assets. Loans will be made only to credit-worthy individuals with sufficient collateral to mitigate any loss. Free banks will compete for the best loans, and charge higher interest rates for more risky loans. Individuals who can tolerate more risk will make the loans the banks will not.

Free Banking and its history.

To facilitate confidence in free banks for digital transactions, the banks could provide video access via the Web to individual accounts that consist of two clear vertical cylinders each suspended by a scale. One cylinder would be for silver BBs and the other for gold BBs. The height of the BBs in the cylinder and the net weight displayed by the scale would provide a visual indication of the deposit. Confidence would be further increased by watching trades as BBs are added to or deducted from the cylinders.

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The BBs would come from and go to a bank exchange account that is also visible on the Web. Periodically the exchange accounts would be used to settle balances among the banks as was done in the past. Instead of bars of gold moved by stage coach or train, tempting theft, BBs could be moved by commercial delivery services in small amounts, discouraging theft.  The extensive dispersal of BBs in individual account containers would discourge theft.

To complete the view of the health of a bank, free banks could also display on the Web their non-monetary assets, loans and collateral, and should welcome audits by their depositors of the accuracy of those displays.