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Free Banking, the Real-Balance Effect, and Walras´ Law

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  • van den Hauwe, Ludwig

Abstract

The author of this article draws special attention to two particular claims of the free bankers concerning the supposed working characteristics of a fractional-reserve free banking system which may strike the reader as questionable. The first of these relates to the alleged absence of a real-balance effect under free banking. The second relates to the free bankers´ reference to Walras´ Law as providing a rationale for the free banking system´s “offsetting” actions when confronted with changes in the public´ s demand to hold bank liabilities. This rationale is defective since it is based on an erroneous interpretation of Walras´ Law. The author´s conclusion does not imply that it is not at all possible, from a rational viewpoint, to make a plausible case for this variant of free banking, only that the argument should be freed from certain questionable tenets.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8765.

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Date of creation: 17 Sep 2008
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Handle: RePEc:pra:mprapa:8765

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Keywords: E0; E32; E42; E5; E51; E52;

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  1. Goulven Rubin, 2005. "La controverse entre Clower et Patinkin au sujet de la validité de la loi de Walras," Revue économique, Presses de Sciences-Po, vol. 56(1), pages 5-24.
  2. Mill, John Stuart, 1874. "Essays on Some Unsettled Questions of Political Economy," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, edition 2, number mill1874.
  3. van den Hauwe, Ludwig, 2006. "The Uneasy Case for Fractional-Reserve Free Banking," MPRA Paper 120, University Library of Munich, Germany.
  4. Laidler, D., 1988. "Taking Money Seriously," UWO Department of Economics Working Papers 8804, University of Western Ontario, Department of Economics.
  5. Say, Jean-Baptiste, 1880. "A Treatise on Political Economy; or the Production, Distribution, and Consumption of Wealth," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, edition 4, number say1880.
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