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Banking

In: A Modern Guide to Austrian Economics

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  • David Howden

Abstract

The Austrian theory of banking spans the fields of law, ethics, and economics. Starting from a legal foundation, we understand banks by their two primary functions. On the one hand banks safeguard deposits; on the other hand, they issue loans. Banks have historically kept these functions separate by intermediating loans between savers and borrowers, and backing deposits with a full reserve. The advent of fractional-reserve banking mixed these two activities. By funding loans with their deposit base, banks have created a conflict between the legal rights of both depositors and borrowers. The legal-economic analysis of banking contracts allows for three further analyses. First, it allows one to identify ethical dilemmas between depositors and borrowers. Second, the economic effects of mixing the two previously separate banking contracts are made clear. Third, the legal-economic framework allows one to pinpoint the origin of banking crises, as well as any resultant economic malaise.

Suggested Citation

  • David Howden, 2022. "Banking," Chapters, in: Per L. Bylund (ed.), A Modern Guide to Austrian Economics, chapter 10, pages 182-199, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:19135_10
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    Economics and Finance;

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