These days, much of the free banking debate focuses on the history of banking. On one side are the free banking advocates who point to the vastly increased macroeconomic stability that occurred in free banking systems. On the other are the free banking haters, such as Lord Keynes from the blog Social Democracy for the 21st Century, who argue that these periods reveal no such thing. Either the economies in question were far from stable, Lord Keynes says, or their banking systems were nothing like free banking. What’s clear from the diametrically opposed viewpoints is that biased readings of history will not help us decide whether free banking is an improvement or a deterioration on our current monetary system.
What matters, instead, is the theory underlying the idea. For this reason I went to the source itself — George Selgin’s The Theory of Free Banking: Money Supply Under Competitive Note Issue.