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Free Banking and the Bank of Canada

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Economists in the nineteenth century spent considerable time discussing the merits of a free-banking system, in which each commercial bank would be able to issue its own notes and deposits, subject to a convertibility requirement backed by its own gold reserves. Such a system, the proponents argued, would be able to deliver price-level stability yet be flexible enough to withstand the vicissitudes of the business cycle. Moreover, there would be no need for central banks. While this idea has received less attention in recent years, some economists still put it forward as a practical alternative to the current system. Laidler suggests that the centralizing tendencies in banking would inevitably undermine competition within a free-banking system, and lead to the natural emergence of one dominant bank. Other developments in the twentieth century, most notably the demise of the gold standard and widespread agreement that governments should play a determining role in setting monetary policy goals, have also limited the practicality of such a system. Laidler examines the Bank of Canada's history from the free-banking perspective and concludes that the current system of inflation targeting provides a much better anchor for orderly price-level behaviour than the free-banking system's convertibility could ever guarantee.

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  • David Laidler, 2006. "Free Banking and the Bank of Canada," Bank of Canada Review, Bank of Canada, vol. 2005(Winter), pages 15-24.
  • Handle: RePEc:bca:bcarev:v:2006:y:2006:i:winter05-06:p:15-24
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    Cited by:

    1. Omerčević, Edo, 2013. "Monetary systems, sustainable growth and inclusive economic development," MPRA Paper 44559, University Library of Munich, Germany.
    2. repec:eee:jmacro:v:54:y:2017:i:pa:p:12-23 is not listed on IDEAS
    3. Lawrence H. White, 2013. "Antifragile Banking and Monetary Systems," Cato Journal, Cato Journal, Cato Institute, vol. 33(3), pages 474-484, Fall.

    More about this item

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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