This excerpt originally appeared in The Economist on December 31, 2011.

Scholars such as Lawrence White of George Mason University see in this the grounds for replacing central banks with “free banking” in which private institutions take deposits and issue their own banknotes without government permission or protection. To make these liabilities credible, free banks would probably have to make them redeemable into something else, such as gold. As a consequence, banks will hesitate before expanding too quickly, lest their gold reserves come under threat. This, Mr White argues, would impose a natural check on overexpansions of credit.