The Uneasy Case for Fractional-Reserve Free Banking
AbstractSince 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 120.
Date of creation: 05 Oct 2006
Date of revision:
monetary and banking regimes; comparative institutional analysis; central banking versus free banking controversy; fractional-reserve free banking; Law and Economics of money and banking;
Find related papers by 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 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
- NEP-BAN-2006-10-14 (Banking)
- NEP-CBA-2006-10-14 (Central Banking)
- NEP-FIN-2006-10-14 (Finance)
- NEP-FMK-2006-10-14 (Financial Markets)
- NEP-LAW-2006-10-14 (Law & Economics)
- NEP-MAC-2006-10-14 (Macroeconomics)
- NEP-MON-2006-10-14 (Monetary Economics)
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