The institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed. Thispaper instead provides realistic grounding for important features by constructing a logical evolutionary account of free banking. Sophisticated and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment. The emergence of standardized commodity money is followed by the development, in turn, of basic money-transfer banking, easily transferable bank liubilities, and clearinghouses. The features of an evolved free banking system differ from those assumed in recent models of competitive payments systems.
We have each made normative evaluations offree banking elsewhere: Selgin [1987, chs. 8lo]; White [1984a, ch. 5; 1984b]. 3. See also Menger [1981, 260-621. The same view appears in Carlisle [1901, 51, and Ridgeway [1892, 471. A more recent version of Menger's theory is Jones (19761. For a secondary account of Menger's theory see O'Driscoll[1985b]. SELGIN I% WHITE: EVOLUTION OF FREE BANKING 44 1the well-known problem of finding what Jevons termed a "double coincidence of wants." Before long some frustrated barterer realizes that he can increase his chances for success by adopting a two-stage procedure. He can trade his wares for some good, regardless of its direct usefulness to him, which will more easily find a taker among those selling what he ultimately wants. It follows that the earliest media of exchange are simply goods perceived to be in relatively widespread demand. The widening of demand for these things owing to their use as media of exchange reinforces their superior salability.Other traders eventually recognize the gains achieved by those using indirect exchange, and emulate them, even though they may be unaware of the reason 4. See Menger [1981, 263-661; Ridgeway [1892, 6-11]; and Burns [1927a, 286-881. On some alleged nonmetallic monies of primitive peoples see Quiggin [1963]. 453 12. Taub [1985] has shown that a dynamic inconsistency facing issuers in Klein's [1974] model 13. This point is emphasized by White [1984c]. For additional criticism of the Black-Fama-will lead them to hyperinflate. Yeager literature see O'Driscoll [1985a],Hoover [1985], and McCallum [1984].
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