States have had varying degrees of influence in different times and places over how banks create money.
In some periods, money creation and the denomination of coins was left completely to the commercial banks. In such times when individual banks had the power to issue their own banknotes one speaks of “Free Banking”. The market alone exercises control over the total amount of money in circulation and over deposits backed by cash, central bank money or gold reserves. Deposits of money created by private banks were not protected by state guarantees against bank insolvency as they are today.
Some supporters of Free Banking either saw absolutely no useful role for central banks or recommended a permanent limitation of central bank money. This would mean that this highest monetary institution could give no credit and there would be no protection for cash and sight deposits by the state. These supporters include Friedrich Hayek and other representatives of the Austrian School of Economics.
Some countries had, above all in the 19th century, periods of relatively unregulated money creation by private banks. However, states often intervened after local banking crises. Legal tender currencies are the only official medium of exchange today and Free Banking is currently not practiced in any country. It is debatable whether or not complementary currencies on the one hand and so-called ‘shadow banks’ on the other hand also demonstrate today some of the qualities of such a liberal money creation regime.
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