<p>This paper explores the potential for reviving free banking principles within modern dollarized economies. Dollarization eliminates the capacity for discretionary monetary expansion, thereby enforcing monetary discipline in contexts where central banking institutions are weak or politically compromised. However, by substituting foreign base money, dollarization also removes the flexibility to adjust the nominal money supply in response to short-term fluctuations in money demand, increasing the risk of monetary disequilibrium. Drawing from historical free banking systems operating under the gold standard, this study examines how private banks issuing redeemable liabilities can function as decentralized mechanisms for monetary adjustment. Under such systems, money supply responds endogenously to changes in velocity and reserves, enabling short-run equilibrium without requiring central policy intervention. In a dollarized context, commercial banks could similarly issue liabilities backed by foreign fiat currency, thereby expanding the effective money supply while preserving the constraints of external monetary discipline. The analysis shows that such a hybrid system–dollarization supplemented by free banking–offers a market-driven alternative to state-controlled monetary regimes. By allowing private banks to adjust liabilities in response to fluctuations in demand, this arrangement mitigates the rigidities associated with a fixed stock of foreign currency. Furthermore, it limits the incentive and informational problems inherent in centralized monetary management. This study contributes to the literature on institutional monetary reform by demonstrating how Austrian monetary theory and historical precedent support a model where monetary flexibility and rule-based discipline coexist through competitive note issuance in a dollarized environment.</p>