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The economics of decentralized money and banking

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  • Robert Wutscher

Abstract

The notion that the rate of interest is the price of money, a variable that equilibrates money demand and money supply, appears to have emerged as a direct translation of supply and demand as it operates on the goods market into the world of finance. This paper argues that the rate of interest should not be seen as an equilibrating mechanism of this sort, nor should it be treated as a natural tool for regulation of price levels; rather, it is the mechanism that, only under a properly designed decentralized monetary and banking system, however, maintains real capital equilibrium, regulating money flows between the real and the financial sectors. This process is negated by the centralized use of short-term interest rates as policy tools. It shows how, in a well-designed decentralized free banking system, bank credit extension would be counter-cyclical to the liquidity fluctuations of the public.

Suggested Citation

  • Robert Wutscher, 2024. "The economics of decentralized money and banking," SN Business & Economics, Springer, vol. 4(11), pages 1-25, November.
    • Handle: RePEc:spr:snbeco:v:4:y:2024:i:11:d:10.1007_s43546-023-00493-6
    DOI: 10.1007/s43546-023-00493-6
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    References listed on IDEAS

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    1. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May.
    2. Ignacio Briones & Hugh Rockoff, 2005. "Do Economists Reach a Conclusion on Free-Banking Episodes?," Econ Journal Watch, Econ Journal Watch, vol. 2(2), pages 279-324, August.
    3. Beckworth, David, 2007. "The postbellum deflation and its lessons for today," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 195-214, August.
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    More about this item

    Keywords

    Money demand; Decentralized banking; Natural interest; Capital yields; Time preferences; Liquidity preferences;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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