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by ensuring that cash earns a positive (inflation-adjusted) rate of return, it can prevent households and businesses from holding inefficiently small money balances.

Further benefits of free banking include dramatic reduction of economic cycles, an end to indirect financing of federal spending, removal of the “lender of last resort” permanent bailout function of central banks, and promotion of currency competition.” This allows Americans many more ways to protect their savings. Because free banking implies that financial services and banking would be governed by general business laws against, for example, fraud or misrepresentation, crony regulatory burdens that hurt customers would be dramatically eased, and innovation would be encouraged.

Potential downsides of free banking stem from its greatest benefit: It has massive political hurdles to clear. Economic theory predicts and economic history confirms that free banking is both stable and productive, but it is radically different from the system we have now. Transitioning to free banking would require political authorities, including Congress and the President, to coordinate on multiple reforms simultaneously. Getting any of them wrong could imbalance an otherwise functional system. Ironically, it is the very strength of a true free banking system that makes transitioning to one so difficult.

Commodity-Backed Money. For most of U.S. history, the dollar was defined in terms of both gold and silver. The problem was that when the legal price differed from the market price, the artificially undervalued currency would disappear from circulation. There were times, for instance, when this mechanism put the US. on ade facto silver standard. However, as a result, inflation was limited.

Given this track record, restoring a gold standard retains some appeal among monetary reformers who do not wish to go so far as abolishing the Federal Reserve. Both the 2012 and 2016 GOP platforms urged the establishment of a commission to consider the feasibility of a return to the gold standard,” and in October 2022, Representative Alexander Mooney (R-WV) introduced a bill to restore the gold standard.*8

In economic effect, commodity-backing the dollar differs from free banking in that the government (via the Fed) maintains both regulatory and bailout functions. However, manipulation of money and credit is limited because new dollars are not costless to the federal government: They must be backed by some hard asset like gold. Compared to free banking, then, the benefits of commodity-backed money are reduced, but transition disruptions are also smaller.

The process of commodity backing is very straightforward: Treasury could set the price of a dollar at today’s market price of $2,000 per ounce of gold. This means that each Federal Reserve note could be redeemed at the Federal Reserve and exchanged for 1/2000 ounce of gold—about $80, for example, for a gold coin the weight of a dime. Private bank liabilities would be redeemable upon their issuers. Banks could send those traded-in dollars to the Treasury for gold to replenish their