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https://hdl.handle.net/2142/70790
Description
Title
Essays on Free Banking
Author(s)
Hoque, Monzurul
Issue Date
1987
Doctoral Committee Chair(s)
Rashid, Salim
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Business Administration, Banking
Abstract
The banking industry is undergoing far-reaching changes in recent years. Everybody is moving into the banking business, and banks are moving into everything else. The deregulatory acts of 1980 and 1982 recognized the competitive forces and removed some Depression-born regulations. The deregulatory environment is stimulating discussions on various regulatory features of the banking industry. In this dissertation we focus on the issue of free note banking, a feature which is regulated in the United States as well as elsewhere. The free banking has important implications for inflation, international finance, and federal deficits.
Free banking refers to competitive issue of brand name convertible notes by unprivileged private banks. Two distinct features of free banking stand out. The first feature is free entry which ensures that there is no privileged banking, and the second one is convertibility of distinguishable notes which afford a vent through which noteholders' demands find expression. The proponents of free banking claims that if banks are left unregulated, good money will drive out the bad money, and thus inflation will be eliminated.
For the second essay we attempt to demonstrate that in the United States there never was free banking in the correct sense of the term. The form of true free banking was altered due to the presence of two hostile camps, viz., hard money Jacksonians and pro-U.S. bank groups, and the influence of the Currency School, among others. In the third essay we analyze the efficiency of markets for free bank notes to see whether noteholders used the information regarding the banks correctly. The proponents of free banking relies on market efficiency for monetary discipline.
The fourth essay provides a general framework for analyzing the free bank failures in the United States. It also demonstrates that it was regulation that prevented avoidance of failure, not the lack of it.
In the fifth essay, we observe that money is a special consumer durable and that is why free banking will lead to the appearance of Gresham's contrary to the belief of free banking proponents. To make the system of free banking work, we need to impose a compulsory unlimited shareholders' liability. This also enables the price to act as a signal when we allow for merger.
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