From what I can gather, the US still suffered bank panics in the 19th century under a free-market economy and these had some knock-on effects across the whole economy, right?
How would these be avoided?
how would bank runs be prevented? well, through confidence in the bank system and sound economic policies that avoid situations like the one we are having now.
also, even if there does occur a bank run, 100% or close to 100% reserves in banks would reduce the negative effects of bank runs.
100% reserves means bank runs would not matter. That is the solution banks must practice 100% reserve banking. This way they are not increasing the money supply and creating inflation
What if the money has been loaned out to businessmen and isn’t there to cover a bank run?
prior to fdic the bank often went under. Banks are free to loan their own capital or their certified deposits(provided the money is there once it matures), just not their demand deposits.
Bank panics are good. They keep bankers honest.
Those banks suffered panics because they were unsound. Trying to avoid bank runs is like trying to avoid business bankruptcy.
What about the panic of 1907? Was this a failure of government, a failure of the market, or a necessary correction?
Banking panics were caused by government promoted fractional reserve banking. You might want to see Rothbard’s “Panic of 1819.”
From Rothbard’s History of Money and Banking in the United States:
While the Treasury had stimulated inflation during 1905–1907, there was
nothing it could do to prevent suspensions of payment, or to
alleviate “the competitive hoarding of currency” after the panic,
that is, the attempt to demand cash in return for increasingly
shaky bank notes and deposits.