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It is well understood today that in the absence of deposit insurance bank runs will occur which will cause enormous economic damage and which will take down even completely healthy and profitable banks.

Actually it is not well understood at all. While the U.S. implemented federal deposit insurance in 1933, Canada did not do so until 1967 but suffered no banking crises in the interim. You are regurgitating an old Goofyhoofy argument that tries to assert that bank runs and the banking crisis caused the Great Depression, where in reality it is more of the reverse causality in that the business depression caused the banking crisis.

According to Elmus Wicker's Banking Panics of the Great Depression more than 60 percent of U.S. bank failures between 1930 and 1932 were not related to run-induced panics, but were instead the result of closure due to insolvency. Furthermore, of the remaining banks, many that were subject to bank runs were interelated or closely connected to one another, which downplays your assertion that completely healthy banks were picked off at random. In reality, business conditions were so depressed that there were virtually no banks with a healthy pool of loans and investments.

Any bank that takes short-term deposits and makes long-term loans is in danger if people think that OTHER people are withdrawing their deposits.M

Not really, as this type of example is one of the need for a bank to obtain short-term liquidity. History shows quite well that liquidity issues are stemmed quite well by the capacity to furnish an elastic currency, one that expands and contracts based on supply and demand. The Federal Reserve was established to furnish an elastic currency, but during the 19the century free banking in regions like Canada and Scotland allowed banks to issue their own banknotes and acomplish the task all the same.

One of the great ironies is that big-governments boosters such as yourself wrongfully belief that the U.S. had a relatively free-market banking system during the 19th century. Quite the opposite, especially during the post-Civil War era under the auspices of the National Banking Act. This era was among the most concentrated in the nation's history in terms of banking/liquidity panics. Among other things, the National Banking Act era;
- slapped a federal excise tax on state banknotes and free banking making such banking uneconomic relative to national banknote issuance
- deliberately created a monetary deflation by moving the value of the dollar back to its pre-war, pre-inflation value of $20.67/gold oz. This was accomplished by freezing the supply of national bank notes (greenbacks) at $660 million and demonetizating silver
-imposed strict reserve requirements on banking institutions which meant that banks could not readily breach these requirements in times of tight liquidity in order to meet liquidity demands (the great Walter Bagehot explained the internal contradiction of building reserves and being unable to access those reserves in times of necessity)
- the incapacity of the National Banking era to create a elastic currency meant that periods of high liquidity demand (especially the harvest season when currency flowed heavily from the NY banks to the interior) precipitated tight money conditions leading to skyrocketing call money rates

Again, Scotland and Canada provide examples of the alternative realities -- free banking allowed for a necessary expansion of liquidity and resulted in no banking panics or widespread failure. Scottish banknotes actually began circulating heavily in England at various times during this era as the Bank of England had been hamstrung in its ability to furnish an elastic currency by the Peel Act of 1844 which mandated that all Bank of England note issuance be 100-percent backed by gold reserves (an important lesson for all those who hold up the supposed virtues of full-reserve banking).

The closest the U.S. ever came to a free banking system was during the period of the 1840's through to the start of the Civil War, a period which had relatively less liquidity crises than the National Banking era. However, even that period was full of regulation that mandated what types of collateral U.S. banks must hold against note issuance, what assets they could lend against and the rigid branch banking restrictins that characterized the U.S. for most of the nation's history (which largely explains why the U.S. has always had a fragmented indepedent banking systems and other countries with less harsh branch banking laws had more consolidated banking interests).

For a nice visual of the degree on banking panic amongst regulated and free banking systems during the 19th century, see pgs. 196-97 of George Selgin's Banking Deregulation and Monetary Order.
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