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

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Author Info
van den Hauwe, Ludwig

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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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Publisher 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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Related research
Keywords: E0; E32; E42; E5; E51; E52;

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Find related papers by JEL classification:
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
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E00 - Macroeconomics and Monetary Economics - - General - - - General

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  1. van den Hauwe, Ludwig, 2006. "The Uneasy Case for Fractional-Reserve Free Banking," MPRA Paper 120, University Library of Munich, Germany. [Downloadable!]
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