According to Hummel and Timberlake, the “Free Banking Era” Was the Most Stable Banking System in American History

Despite all the Hamiltonians’ efforts, the Jeffersonians more or less prevailed for decades. The government remained relatively small and decentralized. By the mid-1850s tariff rates were as low as they would be for the entire nineteenth century, and federal subsidies for “internal improvements” were all but nonexistent. The Bank of the United States was dismantled in the 1830s. The American banking system was dominated by state-chartered banks that issued currency backed by gold and silver on demand and that therefore did not inflate their currency beyond what their specie reserves justified. It was not a perfect system, of course, but two highly reputable economic historians, Jeffrey Hummel and Richard Timberlake, have made compelling cases that it was the most stable banking system the United States has ever had. . . .

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A nationalized banking system was one key element of Alexander Hamilton’s agenda that the Lincoln regime resurrected. It did not seem to matter that such a system had been tried twice, with the First and Second Banks of the United States, and each time had created economic instability and corruption. Nor did it matter that during what economists call the “free banking era,” which began when the Second Bank of the United States was dissolved in the 1830s, the purchasing power of American currency remained stable. This stability resulted precisely because the money supply was denationalized. State governments took a more or less laissez-faire attitude toward banking; about half did not even require a state government charter for individuals who wanted to start a bank, accept deposits, and issue banknotes. Banks, then, were “regulated” mainly by competition in the marketplace: a bank that printed too much currency and did not hold sufficient specie reserves would eventually fail. Such failures did occur, but they remained localized and never caused a national bank panic or depression, as has been the case with nationalized banking systems. Panics and depressions are what economists refer to as “contagion effects” of centralized or nationalized banking.

—Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for America Today (New York: Crown Forum, 2008), 124, 126-127.