Free banking and cryptocurrencies

Why do most historians and economists fail to mention free banking? Why was the issue of money first competitive and free in the history of capitalism? And how do cryptocurrencies today respond to issues similar to the days of free banking? In our previous article, we discussed the concept of private currency. Currency and private currencies –

Henceforth, it is necessary to consider certain recent innovations as a direct echo of the era of “free bank”. Free banking refers to a system in which banks can compete freely to issue money and operate. In addition, one can distinguish the absolute system of free banking in which regulations and monetary authorities are non-existent or almost, from the moderate system of free banking in which agents can issue money and operate freely within the limits determined by law. .

Free banking and competitive economy

The idea that free banking can be a means of emancipating trade and business is not new. It has even happened in the past. The presence of a highly competitive banking system without monetary authority (central bank) has mainly spread to English-speaking countries. However, much older forms of free monetary and financial competition can be found in the past. Exclusive Dossier: The birth of finance in France! –

In an article published in 1987 titled The Evolution of a Free Banking Systemand written by Lawrence White and George Selgin, the two authors show that an unregulated banking system is plausible, and more than that, that it has worked. In France, we had already shown that the country experienced a period of free banking from the Directory until 1803 by the law of the Banque de France with the support of Napoleon Bonaparte. But the free banking period was much more diffused in Scotland and Canada. Indeed, Canada evolved in an era of free banking from 1891 for more than 40 years.

Neil Parmenter, President and CEO, Canadian Bankers Association (CBA). Source : Media Advisory – Canadian Bankers Association President and CEO to participate at the Toronto Global Forum (

It is very interesting to note precisely the banking situation of Canada during the Great Depression of 1929. During the Great Depression, no bank failures were observed. While the crisis rages in the United States, Canada has shown remarkable financial stability. The absence of a central bank (until 1935), and the presence of the Canadian Bankers Association (still active) facilitated market coordination. But throughout the beginning of the 20th century throughout the world, wars and political centralization accelerated the loss of this model by force of law alone.

The emergence of cryptocurrencies and their competition

Since the financialization of the cryptocurrency market in 2017, these digital means of exchange are never more like past eras of free banking. Also, the birth of Bitcoin in 2009 was not the greatest monetary innovation in recent history. The most important remains the emergence of a competitive system of digital currencies, issued by various players. Cryptocurrencies are not just abstract tokens. They are also not developer readable codes only. Consequently, they are a direct echo of the past. And it is in this sense that we must consider their democratization…

Competition between cryptocurrencies is a healthy process that accelerates innovation phases. The appearance of altcoins, changes in protocols (PoS and PoW…), stablecoins, NFTs, staking, data management by the Blockchain… All of this would never have happened without competition between cryptocurrencies. In addition, one must always keep in mind the different phenomena of growth in a market.

  • A growing market whose initial situation consisted of a multitude of small players. In this case, the growth of the market was built on economies of scale which facilitated the concentration of companies. This is the case, for example, of Amazon today, which benefits from an almost monopolistic image.
  • A growing market whose initial situation consisted of a single entity. This is the case for telecoms, for example, but also television and the media, or even the food and crafts sector. Cryptocurrencies also respond to this type of pattern. In general, competition increases as the need for specialization becomes clearer. Cryptocurrency responds to this scheme for the exact reason that the Blockchain or the diversity of currencies allows gains in productivity, security, speed… specific to each sector.

Monetary and financial competition

What are the market laws that apply to competition between currencies and institutions? In economics, a distinction is generally made between monopoly (a single seller), oligopoly (a small group of sellers), and the situation of competition. It is more difficult to say whether a market is in a position of oligopoly or competition insofar as it depends on the number of buyers and players in the market. Thus, it is almost impossible today to qualify the banking market as a competitive market. Rather, it is a particular form of oligopoly. The exercise of the banking activity requires special derogations and insertion in a particular central network. System centralization around central banks, regulations and controls limits competition in the market.

Annual evolution of the number of commercial banks in the United States since 1900. Source: Continuing Decline in Number of US Banks | St. Louis Fed (

When we look in detail at the number of banks per country in Europe, we find a certain regularity. Thus, Germany appears in first position with more than 1,400 banks, followed by Poland with nearly 600 banks and Austria with 468 banks. France comes in fifth position (400 banks). Looking at the case of the United States, we notice that the number of banks was increasing until the depression of 1921. The decade of the 1920s and the depression of 1929 only confirmed a trend of concentration in the banking system.

The evolution of banking competition in the United States

It is thus possible to represent the number of banks in the United States throughout the last two centuries. Between the middle of the 19th century and 1921, the United States experienced an unprecedented and intense increase in the number of banks in the country. It is important to remember that during this same period, there was no central bank in the United States. In our previous article, we discussed adopting the National Bank Act in 1863. In addition, we had recalled that this act forced the banks to use more dollars and Treasury bills. This act therefore favored the expansion of national banks, although the banking system remained generally free and relatively deregulated.

Number of commercial banks in the United States (1837-2017). Source : On the Historical Rise and (Recent) Decline in the Number of Banks | Mercatus Center.

Thus the number of banks exceeded 30,000 in the United States in 1921. But what happened to witness such a blatant decline in the number of banks? To this question, it is important to note that the American central bank was created in 1914. The establishment of the fractional reserve system (required reserves, determination of the rate by a central authority, and credit agreements) significantly constrained the market. Between 1921 and 1934, to which we must add the depression of 1929, the number of commercial banks fell by over 54%!

Since the 1920s, economic history has been nothing but a reduction in the number of banks and a gradation of the associated constraints. Can we really brandish the argument of consumer protection when we know the reasons that motivated the creation of a centralized monetary and financial system?

Towards a need for decentralization?

We touch here on the heart of the problem of the history of modern capitalism: the centralization of affairs… And in particular of affairs relating to exchange, to work, and to savings, to housing, etc… There is no only one big bank in this country that was not closely or remotely linked to political affairs. Also, just like in the United States, the concentration of the economic and financial system in a few entities has obviously favored more expensive financial security, operations that are not always necessarily very transparent, sometimes unexplained profitability and gains, and above all a glaring lack of ‘innovation…

After all, doesn’t the history of monetary innovations teach us that tomorrow’s money will be digital? It is very legitimate to think that the diffusion of digital currency within our economic systems is far too slow and does not meet the needs of businesses if it is carried out through a centralized system. The increasing centralization of the banking system for several decades has significantly blocked the diffusion of new monetary innovations. And this for essentially political reasons. The decline of banking competition for nearly a century is a reflection of a sector suffocated under its own weight.

It is more than ever necessary to put the well-being and the insurance of the new needs of consumers back on the front of the stage. Cryptocurrencies go in the direction of the competition of various currencies, freely issued. It is both a need for specialization and a need for greater transaction efficiency. With cryptocurrencies, all you need is a smartphone to access your phone… And all you need is a computer and a few lines of code to be a banker. In this context, it is obvious that the bank, as well as the competition between banks, must be rethought…

In conclusion

Ultimately, we have seen that a highly competitive banking system is not inefficient and has been an integral part of the history of most countries. In many English-speaking countries, and even more briefly in France, this system is often flattered by the few historians as relatively stable and durable. The disappearance of what has been called the era of free banking is directly linked to the appearance of wars and the strengthening of state power. In this sense, the appearance of the various monetary authorities (beginning with the Banque de France or the American central bank later) everywhere had a similar and rapid impact on the market.

Furthermore, the centralization of the financial system has directly led to the collapse of the number of competing banks and entities in the economy. This trend has been getting worse since the 1980s as the spread of the Internet has revitalized the real needs of consumers. In this sense, the appearance of cryptocurrencies is not only an echo of the authentically free banking system of the time. It is also a means of meeting the needs of new consumers adversely affected by nearly a century of concentration in the banking offer.

Indeed, the current strong centralization of the financial system prevents the diffusion of fast and efficient digital currencies. In addition, the need for specialization of the data and transaction management system allows the market to ensure both its growth and the establishment of increasing competition. True contemporary economic thinking must therefore always consider a decentralization of the banking system and greater business competition.

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