When the status quo is failing badly, policy reformers must think “outside the box” if they are to make major progress with problems that have hitherto proved intractable. We see this scenario playing out at the moment in Argentina, where the new president Javier Milei has taken office this week after being elected on a truly radical reform platform that includes abolishing the Argentine central bank.

Most of the media commentariat was quick to dismiss the idea, but history suggests that it could work. In fact, history is full of cases where banking systems without a central bank — free banking systems — worked very well. Indeed, the Institute of Economic Affairs is today publishing the second edition of The Experience of Free Banking edited by yours truly, an expanded and updated revision of the first edition published in 1992.

This book is a collection of fifteen historical country case studies in Australia, Belgium, Canada, Chile, China (where there are two cases, one in Foochow and one in North East China, and I am aware of more), Colombia, France, Ireland, Italy, Peru, Scotland, Sweden, Switzerland and the United States, plus a world overview. These occurred over diverse periods between the eighteenth and early twentieth centuries. The U.S. “case” is actually a collection of state-level banking experiments that occurred in the generation before the Civil War that broke out in 1861, when the United States had no national central bank and the federal government left banking regulation to the states. There were over sixty cases in all.

The most famous case is that of Scotland, whose free banking system can be dated to 1716 when the Royal Bank of Scotland received its charter to compete against the Bank of Scotland. It was to last until the Scottish note issue was unwisely monopolised in 1844. England, by comparison, had a weak banking system thanks to the various monopoly privileges enjoyed by the Bank of England, which the Bank had purchased by granting the government cheap loans to finance a succession of wars.

The weakness of English banks was highlighted by the English banking crisis of December 1825, when hundreds of English banks failed and England was said to have “come within an inch of reverting to barter”. Scotland was almost untouched. English economists could never explain the success of the Scottish system. Years later, the best that John Stuart Mill could come up with was that free banking worked well north of the Tweed, but badly south of it. In truth, however, free banking had never been tried in England.

The case studies in The Experience of Free Banking show that free banking worked remarkably well across a diverse array of different countries over different periods. Free banking worked well across three dimensions in particular.

The first is that free banking systems were highly innovative, because banks competed aggressively with each other to expand their market shares.

The second is price stability. Free banking gave long-term price stability because it was based on a commodity standard that provided a discipline against the over-issue of money that is the proximate cause of inflation, and this discipline does not exist under a fiat money system. The price record of the bimetallic then classical gold standard is vastly superior to that of the central banking systems that succeeded them. To illustrate, UK prices are now almost 143 times what they were in 1914, when the classical gold standard was abandoned. By contrast, to the extent we can tell, prices in 1914 were not too much different from what they had been when Sir Isaac Newton had reformed the currency in 1717.

The third is financial stability. Its record here is impressive, though not perfect. Free banks were highly capitalised and much more stable than modern banks, and financial crises under free banking were notable for their rarity.

Free banking ended not because it somehow “failed”, but because governments wanted a pet bank to give them cheap loans, and the only way to buy such loans was to grant their pet banks privileges that undermined both the banking system and the currency. This original sin has spawned no end of subsequent problems that plague us to this day, and which can only be solved by courageous reformers taking a chainsaw to the central bank and all the regulatory nonsense that goes with it. Cry not for thee, Argentina.