What is free banking?
FREE banking is a financial system in which the banks of the nation or other state power are not under any special government regulations beyond what would apply to any business. There is no financial authority supported by the central bank or the government that issues the currency or sets interest rates in the free banking system. Instead, each bank can issue its own currency in the form of banknotes and perform their business, such as lending money or other investments, as it considers appropriate, without government restrictions or regulations. As for the currency, the bank would only issue a part of the currency for a given amount of physical source, such as dollars per ounce of gold or silver. By changing the amount of currency printed to the increase in the source, the bank could change and control the value of its currency to maintain its position on the financial market, to provide security for its investors. While the value of the currency issued by the bank could vary early, in time all banks in the free banking system nAkonk succumbed to the market and agreed in the set, but not legally forced value for all currency.
Creating currency is also one of the shortcomings of the free banking system. If the bank was reprinted by the currency, the value of the existing currency held by its investors and clients could be significantly reduced. Similarly, if the bank would make a bad investment, or otherwise it could not benefit from its expenditure, the value of its resources could decrease, which also reduced the value. If the failure is sufficiently, the bank could go bankrupt, and its currency lost all the value beyond the immediate physical value of the sources that the bank has in possession.
No regulations, free banking systems are not obliged to maintain a specific amount of resources in reserve, as is the case with centralized banking systems. Also, these banks are not limited in the number of unsecured loans that can PSKyytnit or which they can obtain from other banks or businesses. These factors, along with the fact that there is no government or centralized bank to guarantee the bank's currency, can keep the bank vulnerable to forces outside their immediate market, such as wars or even reduced productivity that occurs during drought or other natural disasters.
During the 17th and 18th centuries, many nations experimented with variants of free banking systems, including Australia, Switzerland and the United States. In 1902, no nation still operated a real bank system for free. The reasons for failure varied from unethical banking policies to unexpected depreciation worth the currency to a simple public confusion over the diversity and currency types is Issed.