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The Uneasy Case for Fractional-Reserve Free Banking

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  • van den Hauwe, Ludwig

Abstract

Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes several conceptual flaws in this proposal. In particular several claims of the fractional-reserve free bankers with respect to the purported working characteristics of this system are criticized from the perspective of economic theory. In particular, the claim that a fractional-reserve free banking system would lead to the disappearance of the business cycle is recognized as false. Furthermore an invisible-hand analysis is performed, reinforcing the conclusion that fractional-reserve free banking is incompatible with the ethical and juridical principles underlying a free society.

Suggested Citation

  • van den Hauwe, Ludwig, 2006. "The Uneasy Case for Fractional-Reserve Free Banking," MPRA Paper 120, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120
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    Cited by:

    1. van den Hauwe, Ludwig, 2008. "Free Banking, the Real-Balance Effect, and Walras´ Law," MPRA Paper 8765, University Library of Munich, Germany.
    2. van den Hauwe, Ludwig, 2007. "Professor Becker on Free Banking: A Comment," MPRA Paper 8251, University Library of Munich, Germany, revised 05 Nov 2007.
    3. van den Hauwe, Ludwig, 2006. "Review of Huerta de Soto´s `Money, Bank Credit, and Economic Cycles´," MPRA Paper 49, University Library of Munich, Germany.
    4. Vicente Moreno-Casas & Philipp Bagus, 2021. "The ethics of care and the tragedy of the commons," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(4), pages 405-422, December.

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    More about this item

    Keywords

    monetary and banking regimes; comparative institutional analysis; central banking versus free banking controversy; fractional-reserve free banking; Law and Economics of money and banking;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • K39 - Law and Economics - - Other Substantive Areas of Law - - - Other
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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