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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.

Suggested Citation

  • van den Hauwe, Ludwig, 2008. "Free Banking, the Real-Balance Effect, and Walras´ Law," MPRA Paper 8765, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8765
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    References listed on IDEAS

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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. Glasner,David, 1989. "Free Banking and Monetary Reform," Cambridge Books, Cambridge University Press, number 9780521361750, April.
    5. David E. Laidler, 1988. "Taking Money Seriously," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 687-713, November.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    E0; E32; E42; E5; E51; E52;

    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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