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The unresolved problem of gratuitous credit in Austrian banking theory

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  • Raymond C. Niles

    (George Mason University)

Abstract

Ludwig von Mises called gratuitous credit, the ability banks have to create new credit, the chief problem in a theory of banking. This paper traces how Mises and succeeding generations of Austrian-school economists have grappled with this problem, but have failed to find resolution. The result is that Austrian economists disagree on a variety of issues in banking and business cycle theory, such as whether there is an endogenous business cycle under free banking, or cycles only occur under central banking. Before a resolution can be attempted, current thinking must be clarified. This paper divides Austrian economists into five schools of thought. It points to a possible resolution in the economic development writings of Joseph Schumpeter.

Suggested Citation

  • Raymond C. Niles, 2017. "The unresolved problem of gratuitous credit in Austrian banking theory," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(1), pages 83-105, March.
    • Handle: RePEc:kap:revaec:v:30:y:2017:i:1:d:10.1007_s11138-016-0352-1
    DOI: 10.1007/s11138-016-0352-1
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    References listed on IDEAS

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    1. Selgin, George & White, Lawrence H, 1996. "In Defense of Fiduciary Media--Or, We Are Not Devo(lutionists), We Are Misesians!," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 9(2), pages 83-107.
    2. Brian P. Simpson, 2014. "Money, Banking, and the Business Cycle," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-33656-9.
    3. Hayek, F. A., 2012. "Hayek on Hayek," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226321202 edited by Kresge, Stephen & Wenar, Leif, December.
    4. Roger Koppl, 2002. "Big Players and the Economic Theory of Expectations," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-62924-0.
    5. Roger W. Garrison, 1986. "Hayekian Trade Cycle Theory: A Reappraisal," Cato Journal, Cato Journal, Cato Institute, vol. 6(2), pages 437-459, Fall.
    6. Gerald O’Driscoll & Douglas Rasmussen, 2012. "Did Hayek have a monetary theory of business cycles?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 255-262, September.
    7. Brian P. Simpson, 2014. "Money, Banking, and the Business Cycle," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-33149-6.
    8. Lawrence H. White, 1999. "Why Didn't Hayek Favor Laissez Faire in Banking?," History of Political Economy, Duke University Press, vol. 31(4), pages 753-769, Winter.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. James Caton, 2020. "The evolution of Hayek's thought on gold and monetary standards," Southern Economic Journal, John Wiley & Sons, vol. 87(1), pages 386-405, July.

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    More about this item

    Keywords

    Gratuitous credit; Endogenous money; Free banking; Central banking; Austrian business cycle theory; 100 % reserves; Fractional reserves; Precautionary reserves; Business cycle;
    All these keywords.

    JEL classification:

    • B25 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Historical; Institutional; Evolutionary; Austrian; Stockholm School
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises

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