In a free banking system, market forces control the total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of fiat money issued by a central bank.
There is, therefore, no government agency acting as a monopoly "lender of last resort", leaving that to the private sector as happened in the US in the panic of 1907.
Free banking as a subject of renewed debate among economists got its modern start in 1976 with The Denationalisation of Money, by economist Friedrich Hayek, who advocated that national governments stop claiming a monopoly on the issuing of currency, and allow private issuers like banks to voluntarily compete to do so.
In the 1980s, this expanded into an increasingly elaborate theory of free market money and banking, with proponents Lawrence White, George Selgin, and Richard Timberlake increasingly centering their writing and research around the concept, either regarding modern theory and application, or researching the history of spontaneously free banking.
In the 1890s a land price crash caused the failure of many smaller banks and building societies.
[citation needed] In the 19th century, several Swiss cantons deregulated banking, allowing free entry and the issue of notes.
These laws made it necessary for new entrants to secure charters, each of which was subject to a vote by the state legislature with obvious opportunities for corruption.
The lack of branch banking, in turn, caused state-issued banknotes to be discounted at varying rates once they had traveled any considerable distance from their sources, which was an inconvenience.
[24][25] Jiaozi was a form of banknote that appeared around the 10th century in the Sichuan capital of Chengdu, China.
Until the government decided to regulate the business due to alleged increasing fraud cases and disputes, it granted 16 licenses to the biggest merchants of all.