Many people ask from where I get my cynicism with popular banking theory. It's a tough question. I'll try and map it out from my amateur economist point of view.
For the most part, monetary theory is accepted as reasonably well understood by economists, if not by politicians. It basically says things like - hold this constant, let that float, and you can wiggle the economy in a certain direction.
On the fringes, there are some challenges, and to pre-judge them somewhat, they are broadsides.
First up is F.A.Hayek, with Denationalisation of Money, 1976. He basically says that competition in monies is good, and there is no problem with private money. OTOH, he says, there are huge problems with government money.
If Hayek is the broadside, Lawrence White is the torpedo. His Free Banking in Britain describes a mathematical model showing stability in free banking, and in great detail tracks the rise and fall of free banking in Scotland, under the jealous and greedy nose of the Bank of England.
The contrast between the Scottish experience
and that of the English will change forever
your view of banks, regulators and money.
White's book is possibly the most important, historically, but one should turn to Kevin Dowd, Laissez Faire Banking for more clarity of expression, and lots of examples (US, Oz) that flesh out the Scottish example.
Especially, the introductory piece
The Evolution of a Free Banking System
is a masterpiece.
To go deeper, real economists will probably want to look at George Selgin, who takes on the various criticisms against Free Banking, and debunks the ones that are debunkable. His Bank Deregulation and Monetary Order is a series of articles on the subject which will provide more satisfaction for the economist.
Note that it includes
Selgin and White's important article
"How would the Invisible Hand handle money?"
published in J. Economic Literature,
Vol. XXXII, No. 4 (December 1994).
One of the more important historical documents is Vera C. Smith's The Rational of Central Banking, 1936. Her thesis was written under the supervision of Hayek, and its contents evidently kept alive a tradition for four decades until the new generation of free bankers arose to carry on the fight, led suprisingly by her supervisor's Denationalisation of Money in 1976.
Alan Greenspan is a closet gold banker. In his "Ayn Rand" years, he penned Gold and Economic Freedom, described thusly:
In 1976, when Alan was not under a political spotlight for his every public utterance, he wrote what many believe to be his true thoughts regarding the basis of proper economic management. Under the title "Gold and Economic Freedom," he laid out a few straightforward arguments why free banking and the gold standard stands as the protector of an economy's stability and balanced growth. He offered that prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. When restrained by the ties of currencies to gold economies went into sharp, but only short, contractions.
Steve Schear, 6th November 2002.
All of the above books are readily readable (except maybe Selgin, he is deep) and *required* reading for people who are involved in digital instruments.
For really light reading, or that special Xmas present for grandma who is always asking "just what is it you do, again?" you might want to turn to David Boyle's Funny Money. Written by a British author (and only available there currently), this book takes a mild, mystified and progressive walk through the world of private currencies. Boyle travels to the location of some of the more successful community monies, and in the style of a travelogue, attempts to divine the secrets and share the colours of the experience.
As long as you are not in a hurry, Boyle is fine. He includes more local colour than anyone could reasonably expect, and the actual meat would fit in a pamphlet a quarter of the size of the 216 pages. But there are compensations, like his ability to build a picture of economic collapse, leading to the arisal of alternates to money starvation. Such a picture requires many brushstrokes before making way to the occasional master.
Serious students of money will find,
among other great descriptions, the
Interview with Paul Glover
of Ithaca Hours fame,
as one of the highlights.
Be warned, that Boyle tends to lean more to socialism than economics, but not so disastrously that the reader is left frustrated.
Community currencies as described by Boyle are on the rise. This is as a direct response to the failure of money in Latin America, especially in Argentina. A resource page for these developments is Thomas H. Greco, Jr's Reinventing Money page, which follows the E. C. Riegel and the "German School" (an area I have not read enough of but it might be described as "Hayek before Hayek").
For a modern prototype of at least one view of the financial cryptography world, the technological analogue to the world of Free Banking, readers are referred to Neal Stephenson's Cryptonomicon. This is a novel about using gold as the basis for electronic money (amongst other things).
I review Cryptonomicon on my
Crypto Fiction Page.
Reading crypto fiction represents a nice
change of thread from building the financial
cryptography systems at
Systemics
that derive
so much of their foundation from Free Banking.
Academically minded skeptics should note that whilst this novel takes the appearance of a science fiction thriller, it is not science fiction at all. Working models of the novel's vision were in production and usable before the book was even started.
Glyn Davies' A History of Money is a great, huge, highly readable account of how we got to here.
With similar historical breadth, a new book by Peter Bernstein, The Power of Gold: The History of an Obsession, describes the arisal and progress of gold as a monetary standard. I've not read all the way through, but it is highly readable, if light and alegoric in nature. Certainly recommended for some perspective relating to the current bust of Internet gold currency activity.
For an upgrade in economics, probably the best book is Henry Hazlitt's Economics in One Lesson. This is the book you recomend to anyone who asks you to explain economics from scratch, and even though it is 50 years old or more, it still tops the charts at Laissez Faire Books.
At the edges of monetary economics, there are some other important comments. These include the public choice thesis - there is no government, just a collection of self-interested individuals - and the comment by Mises (I think) that says that the government is certainly no better at decision making than anyone else, and probably a lot worse (so why ask it to make decisions...). Also see New Monetary Economics - I haven't - and Transactional Cost Economics, which discusses the Coasian view that the relative costs of transactions drive many things, including the size of firms.
This list wouldn't be complete without a reference to Michael Kuczynski, my prof from London, for whom I wrote my first paper. The international financial system is somewhat more transparent for his barbs, but you had to be there.
An old favourite is David Ricardo, after whom we named our secure payments architecture. In order to explain the name, I cribbed some notes on Ricardo and his theory of comparitive advantage from the net. One idle Sunday, I also captured and reformatted his Principles.
You can get many of the books mentioned above at Laissez Faire Books in their Currency and Banking section. They tend to carry stock of the ones they mention on the page. Otherwise, Amazon carries most, and their links are at least long-lived unlike their competitors. In this field, it is useful to maintain a long view.