Only Free Banking Would Have Rendered the Market Economy Secure against Crises and Depressions

If banking were entirely “free,” meaning “capitalist” in the true sense of the word; if banks were not protected and regulated by the state; if they did not enjoy the privilege of a “lender of last” resort and, in particular, if that “lender of last resort” could not provide unlimited new reserves to the banks; if individual banks were under full risk of default just as any other true capitalist enterprise; and if the public knew this and acted accordingly, banking would be more limited and most certainly safer, not least for the economy as a whole. As Ludwig von Mises put it:

Free banking is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all the information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular—one is tempted to say normal—feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.

--Detlev S. Schlichter, Paper Money Collapse: The Folly of Elastic Money, 2nd ed. (Hoboken, NJ: John Wiley and Sons, 2014), 86.