The Uneasy Case for Fractional-Reserve Free Banking

Ludwig Van Den Hauwe

MPRA Paper from University Library of Munich, Germany

Abstract: Since 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 incompatible with certain other claims on behalf of this system. 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.

Keywords: monetary and banking regimes; comparative institutional analysis; central banking versus free banking controversy; fractional-reserve free banking; Law and Economics of money and banking (search for similar items in EconPapers)
JEL-codes: B53 E32 E42 E50 G18 H11 K39 P34 (search for similar items in EconPapers)
Date: 2006-10-05
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Working Paper: The Uneasy Case for Fractional-Reserve Free Banking (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119085

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