Free banking as an evolving system: The case of Switzerland reconsidered


Selgin and White (Economic Inquiry 25:439–457, 1987) argue that during its evolution a free banking system can be expected to reach certain stages of development. This paper uses their conceptual framework to investigate the free banking era in 19th century Switzerland and makes three contributions to the literature on free banking. First, I find that the development of the Swiss banking system closely matches the stylized evolutionary path depicted by Selgin and White. Second, I argue that after the introduction of the federal banknote law in 1882, the Swiss banking system can no longer be characterized as one of free banking. Third, I maintain that the evolutionary approach offered by Selgin and White opens the door to a better explanation of inter-bank note exchange complications during the 30 years preceding the introduction of a Swiss central bank in 1907 than alternative approaches.



  1. 1.

    For an overview of the literature see, for instance, Dowd (1992), Selgin and White (1994), and Briones and Rockoff (2005).

  2. 2.

    In 1865, Switzerland joined the Latin Monetary Union with Italy, France, and Belgium.

  3. 3.

    Weber (1992: 196) maintains that the Swiss banking system is correctly characterized as a system of free banking only until the implementation of the federal banknote law in 1882.

  4. 4.

    Jöhr (1915: 87) reports that the Banque Cantonale du Valais suspended specie payments temporarily.

  5. 5.

    For a detailed account of the Swiss banking industry of the 19th century, see Jöhr (1915). For the numbers of operating banks, see in particular Jöhr (1915: 521).

  6. 6.

    Translated from German into English by the present author.

  7. 7.

    Landmann (1905: 2; 1910: 10) contends that all except one canton, Neuenburg, had implemented a note tax. There is, however, no evidence to be found for this claim in Bundesrath (1875) or Bundesrath (1880) and Bundesrath (1880) contains a list of seven cantons that explicitly did not have a note tax.

  8. 8.

    The canton Jura was not formed until 1979.

  9. 9.

    The present author’s calculations are based on Jöhr (1915: 424–439)

  10. 10.

    The territorial separation of the independent cantons was in part reduced in 1848 when the first Swiss constitution gave rise to a federal political structure, leading to a loss of autonomy of the cantons as self-governing units and the removal of exchange controls between the cantons (Weber 1992: 191). In the course of the formation of the federation, the Swiss Franc was introduced as the uniform Swiss currency in 1850 under vehement protests from banks in the German speaking part of Switzerland (Gygax 1907: 55–61). Before 1850, Swiss banks had issued notes denominated in various foreign currencies adding to the geographical barriers for the circulation of notes (Weber 1988; Jöhr 1915: 17–34).

  11. 11.

    In 1859 the fee was reduced to ½ per mille (Bleuler 1911: 268).

  12. 12.

    The Bank in Zürich was in part paid directly for its services and in part received remuneration in form of interest payments on deposits the participating banks made.

  13. 13.

    Translated from German into English by the present author.

  14. 14.

    Private individuals could no longer issue notes.

  15. 15.

    Translated from German into English by present the author. Adolf Jöhr, on whom Neldner (1992) relies heavily throughout his work, was the general secretary of the Swiss central bank while writing his book over the years 1912–1914.

  16. 16.

    Hickson and Turner (2004: 912) also consider the period from 1881 to 1906 one of lightly regulated free banking but, in contrast to Neldner, argue that the regulations in place successfully prevented over-issue. In their overview of historical episodes of lightly regulated banking systems, Hickson and Turner (2004: 906) split the experience in Switzerland into two episodes 1834–81 and 1881–1906. They argue that in the early period, depending on the canton, there were restrictions on investment in real-estate, investment in securities, insurance activity, note issue, deposit issue, and reserve requirements in place. This is at odds with the statements referred to above made by Ernst (1904) and Bundesrath (1875, 1880) to which Hickson and Turner (2004: 906) refer via Landmann (1910: 10). They also refer to Weber (1992: 196) as source for information on cantonal note issue limitations in proportion to paid in capital. On the referenced page, however, Weber (1992: 196) discusses the measures implemented by the banknote law of 1881 instead of cantonal regulations.

  17. 17.

    In 1891, a clearing house for the region Zürich was established and attracted a considerable volume that grew continuously over the 1890s (Ernst 1904: 83–84). Ernst (1904: 84) also points to the existence of similar regional clearing houses in other areas of Switzerland; for instance Basel.

  18. 18.

    Since the arbitrageurs operated in the region close to France, they presented Swiss Francs for redemption at only a few banks. Between 1890 and 1904, the Banque du Commerce in Geneva had to redeem about 50 % of the excess notes. For the years 1898 and 1899 only about 60 % of the notes presented for redemption at the Banque du Commerce in Geneva had been issued by other banks although Banque du Commerce in Geneva’s market share was only 8.3 % and 10.5 % respectively (Neldner 1998, 292).

  19. 19.

    Nedwed (1992, 249) notes that under a gold standard “continuous increases” in the amount of notes issued are obviously impossible.

  20. 20.

    In 1899, the note issuing banks even came to an agreement to partially reimburse the affected banks for their costs incurred through the import of specie. For details on the agreement see, for instance, Jöhr (1915: 241–243).

  21. 21.

    Note that non-discrimination among banknotes from different banks by the customers cannot be the explanation of continuous overissue by some banks as long as the notes of various banks are identifiable and the redeeming banks can in principle return notes to the issuing banks, as was the case in Switzerland.

  22. 22.

    Nedwed (1992) does not appear to attempt to provide an answer for why the affected banks did not return the notes presented to them for redemption to the banks of issue.


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I am grateful to William Luther, Adam Martin, Daniel Smith, and two anonymous referees for their comments and the Mercatus Center for generous research support.

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Correspondence to Alexander Fink.

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Fink, A. Free banking as an evolving system: The case of Switzerland reconsidered. Rev Austrian Econ 27, 57–69 (2014).

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  • Free banking
  • Switzerland
  • Evolution
  • Clearing arrangements

JEL Classification

  • N23
  • E4