The Free Banking Alternative; D. Wells and L.S. Scruggs

98 and it allowed all these institutions to borrow from the Federal Reserve. It is apparent that Congress did not intend to unleash the forces of com petition on the financial system. If this had been Congress' intention, it would have phased out, rather than increased, deposit insurance and would have left the amount and lo cation of reserve holding to the in dividual institutions. The purpose of this paper is to ex plain how a completely free banking system would operate. Under free banking, all financial institutions are subject only to the general laws of incorporation and against fraud. They would not be restrained by the rules of a central bank and not be audited by any government agency, nor be protected by any government deposit guarantee. The first part of this paper hypothesizes how individTHE FREE BANKING ALTERNATIVE 99 ual banks would thrive in this com petitive environment, while the sec ond part shows how the most serious problem this economy faces-infla tion-can be controlled without any government agency doing the controlling.