Free Banking vs Central Banking - Which Implications for the EMU?

Abstract

The simulations proposed are based on a model inspired by Vera Smith's The Rationale of Central Banking. Smith's thesis was that the Currency School principles-believed to be at the origin of the creation of national Central Banks--would have been best defended by well-organised free banks rather than by a centralised authority. The prospect of a European monetary union should revive the interest for the debate which has never been settled at the theoretical level. The on-going process aiming at a European union should promote a wellbalanced reconsideration of the theoretical arguments freeing the discussion from the pragmatic attitude that made Bagehot state in his famous Lombard Street:“Do you propose a revolution? Do you propose to abandon the one reserve system, and create anew a many-reserve system? My plain answer is that I do not propose it. I know it would be childish. Credit in business is like loyalty in Government. You must take what you can find of it, and work with it if possible”.