Float free banking is a historical banking system where banks are not required to hold reserves with a central bank. They are free to issue their own banknotes and coins, and to accept deposits, all without direct government control.

Here's a more detailed breakdown:

• Decentralized Banking: The system is characterized by a large number of independent banks, each operating without a central authority dictating reserve requirements or monetary policy.


• Banknote Issuance: Individual banks issue their own banknotes, which circulate as currency. The value of these banknotes depends on the perceived solvency and reputation of the issuing bank.


• Competitive Currency: Banknotes from different banks compete with each other for acceptance by the public. Banks must maintain confidence in their ability to redeem their notes for specie (gold or silver) to ensure their widespread use.


• Self-Regulation: Proponents argue that market forces, such as reputation and the threat of redemption requests, provide sufficient discipline to prevent banks from over-issuing notes or engaging in risky lending practices.


• Elastic Currency: The money supply theoretically adjusts to the demand for credit, as banks can issue more notes when economic activity increases and redeem notes when demand falls.

• Scotland (1716-1844): Often cited as the most successful example of free banking. Scottish banks were relatively stable and innovative, and the system fostered economic growth.


• United States (Various periods, notably before the National Banking Act of 1863): The U.S. experienced periods of relatively free banking at the state level. These periods were often marked by instability and the circulation of notes from poorly capitalized or fraudulent banks.


• Canada (1817-1935): Canada had a decentralized banking system with privately issued banknotes that proved relatively stable, although not entirely "free" due to some regulations and government oversight.

• Efficiency: Eliminates the need for central bank intervention, potentially leading to more efficient allocation of capital.


• Innovation: Banks are incentivized to innovate and improve their services to attract customers.


• Market Discipline: Market forces, such as the threat of bank runs and the need to maintain a good reputation, keep banks in check.


• Responsiveness to Demand: The money supply can theoretically adjust more quickly and efficiently to changes in economic conditions.

• Instability: The lack of a central bank to act as a lender of last resort can lead to bank runs and systemic crises.


• Information Asymmetry: It can be difficult for the public to assess the solvency of individual banks, leading to uncertainty and distrust.


• Counterfeiting: The proliferation of different banknotes can make it easier for counterfeiters to operate.


• Transaction Costs: Dealing with multiple currencies from different banks can increase transaction costs and complexity.


• Inequitable Power: In a completely unregulated system, larger, more established banks could potentially exert undue influence.

While a pure float free banking system is not currently in operation in any major economy, the ideas behind it continue to be debated. Some proponents of cryptocurrency and decentralized finance (DeFi) see parallels between free banking and these emerging technologies. They argue that cryptocurrencies can provide a decentralized and competitive alternative to traditional fiat currencies.

In conclusion, float free banking is a complex and controversial topic with a long history. While it offers potential benefits such as efficiency and innovation, it also carries significant risks related to instability and information asymmetry. The historical experience with free banking systems has been mixed, with some examples showing success and others showing failure.