
In 1975, Hugh Rockoff published a re-examination of the free banking era
in the _Journal of Economic History_, which is the most respected journal
on the topic.

Anyway, Rockoff showed that free banking worked far better than had generally
been thought, not unlike how people today manage to deal with multiple
currencies, travelers' checks, etc.

A few years later (1981, if memory serves), Rolnick and Weber, of the
Minneapolis Federal Reserve, published research on the free banking era,
stating that denationalization of money worked remarkably well.  (Their
article appeared in the Minneapolis Fed's magazine.)  In 1983, Gary Gorton,
of the Wharton School's Finance Department, published in the _Journal of
Economic History_ that the free banking era was marked by price stability
and by resilience during otherwise difficult financial times.  Later, Gorton
did research on how people, facing no national currency, were able to know
whether notes from banks with which they were unfamiliar had any value (e.g.,
so-called "wildcat banks" with an address way out in the hinterlands, out of
state banks, etc.)--how could people know, Gorton asked, whether notes from
banks were counterfeit, or if the banks the notes were drawn on were spurious,
or if a non-local bank had adequate gold reserves to back its notes?  Several
ways:  First, a secondary market in note-brokerage cropped up.  Note brokers
would exchange distant notes for local ones, charging a small fee.  Despite
the difficulties involved in getting, say, a Wisconsin note received in
Pennsylvania back to its home bank (this, recall, was pre-civil war, hence no
major railways to do this), such notes traded, for the most part, at a
discount of 2 to 3 cents on the dollar.  (I know this from having assisted
Gorton with this research.)  There were exceptions:  bank note reporters,
published monthly, tracked every known U.S. bank's notes, its major
counterfeits' distinguishing marks, and its solvency.  These journals also
reported on the known spurious notes to have appeared in the region, and
provided tips on using the telegraph when a note or a bank was in doubt.

The second major way individuals dealt with multiple, privately-issued
gold-backed currencies was to favor banks that belonged to a clearing house
system.  These voluntary, private organizations acted like central banks
when there were financial panics, among clearing house members only.  Thus,
banks would join a clearing house, knowing that they might have to bail out
an insolvent bank, in exchange for having control over any bank being bailed
out by the clearing house system.  It made economic sense, in that the costs
of bank failures were generally higher.  Moreover, there were sane limits
on how far one could mismanage a bank:  If things were really bad, the clearing
house might expel a bank from membership.  That way, depositors distrusted the
mismanaged bank, but not the entire banking system.

The panic of 1857 provides some insight for comparing how well free banking
worked relative to state-run banking.  For various political reasons (largely
dealing with the tariffs that aggravated North-South tensions), there was a
nation-wide shortage of gold in that year, which led banks, for six months,
to suspend redemption of their notes in gold specie.  During those months,
gold bullion itself traded at a 6% premium in Philadelphia.  (Pennsylvania,
it should be noted, was a state-charter banking state, unlike New York and
Massachusetts, which had free banking.)  Notes from New York, Massachusetts,
and several other places traded at a 2-to-3% premium during this panic, despite
considerable transportation costs.  Notes, in general, traded at a premium in
Philadelphia only if one of two conditions were met:  (a) Note was from bank
in free banking state, or (b) Note was from bank that was member of clearing
house.  These almost entirely overlapped, as the clearing houses cropped up
in free banking states, but several northern New Jersey banks joined the
New York Clearing House, and several New England banks joined that in Boston.
By the way, northern (NY area) NJ notes sold at a premium, but southern (Phila
area) NJ notes did not.

The moral of all this:  Jackson's letting the Second Bank of the United States
collapse, in addition to being unavoidable, was hardly a serious crisis.  Van
Buren's blocking the creation of a Third Bank of the U.S. was sound economic
policy as well as sound politics.  In fact, van Buren went on to try to make
the Treasury independent of the government, in an attempt to decentralize
authority further.  Sigh.  Those were the days.

