Abstract
Fiat money and fractional-reserve banking play primary roles today in causing the business cycle. Fiat money has not always played a role, since it has not always existed. However, fractional reserves existed early in banking history and have virtually always played a role in causing the business cycle. Debasing and clipping commodity money have contributed to episodes of the cycle in the past as well (and perhaps have even been the sole cause in some cases). However, their causal role has been minor when considering the overall history of money and banking. The main causes have been fiat money and fractional-reserve banking, especially the latter.
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Notes
See Chapter 1 of Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 1: Integrating Theory and Practice (New York: Palgrave Macmillan, 2014) to see how this is done.
George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 513 and 957.
See Larry J. Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (Auburn, AL: The Ludwig von Mises Institute, 2008), pp. 87–88;
Sydney G. Checkland, Scottish Banking: A History, 1695–1973 (Glasgow, Scotland: Collins, 1975), pp. 184–186 and 222;
Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, translated by Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), pp. 43–44;
and Frank Whitson Fetter, Development of British Monetary Orthodoxy, 1797–1875 (Cambridge, MA: Harvard University Press, 1965), p. 122.
Mark Skousen, Economics of a Pure Gold Standard, 3rd ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc., 1996), pp. 22–24.
Richard M. Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, MA: American Institute for Economic Research, 1990), p. 80.
Richard M. Salsman, The Collapse of Deposit Insurance—and the Case for Abolition (Great Barrington, MA: American Institute for Economic Research, 1993), p. 13.
George J. Benston, Perspectives on Safe & Sound Banking: Past, Present, and Future (Cambridge: The MIT Press, 1986), p. 231 and Salsman, Breaking the Banks, p. 66.
Maureen Burton and Ray Lombra, The Financial System and the Economy, 3rd ed. (Mason, OH: South-Western, 2003), pp. 312–314.
For a similar view, see William M. Gouge, A Short History of Paper Money and Banking in the United States, to Which Is Prefixed: An Inquiry into the Nature of the System, part 1 (New York: Augustus M. Kelley, 1968 [1833]), pp. 113 and 119.
Hans-Hermann Hoppe, Jörg Guido Hülsmann, and Walter Block, “Against Fiduciary Media,” The Quarterly Journal of Austrian Economics vol. 1, no. 1 (1998), pp. 19–50. The quotation is taken from pp. 21–22.
Ayn Rand, The Virtue of Selfishness (New York: Signet, 1964), pp. 126 and 130.
For a thorough discussion of the distinction between the metaphysical and the man-made, see Ayn Rand, Philosophy: Who Needs It (New York: Signet, 1982), pp. 23–34.
Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, Inc., 1966), p. 446.
Also see Richard M. Salsman, Gold and Liberty (Great Barrington, MA: American Institute for Economic Research, 1995), p. 53 and Skousen, Economics of a Pure Gold Standard, p. 98.
and George A. Selgin, The Theory of Free Banking (Totowa, NJ: Rowman & Littlefield, 1988), pp. 54–55.
Lawrence H. White, “Accounting for Fractional-Reserve Banknotes and Deposits—or, What’s Twenty Quid to the Bloody Midland Bank?” Independent Review vol. 7, no. 3 (Winter 2003), pp. 423–441. See in particular pp. 425–427.
On this idea, see Olivier Ledoit and Sébastien Lotz, “The Coexistence of Commodity Money and Fiat Money,” University of Zurich, Department of Economics Working Paper Series, working paper no. 24 (August 2011). See p. 5 of this paper.
See George Selgin, Bank Deregulation and Monetary Order (London: Routledge, 1996), p. 135
and Kevin Dowd, “Option Clauses and the Stability of a Laisser Faire Monetary System,” Journal of Financial Services Research vol. 1, no. 4 (December 1988), pp. 319–333 for this argument. See p. 327 in the latter reference.
Parth J. Shah, “The Option Clause in Free-Banking Theory and History: A Reappraisal,” The Review of Austrian Economics vol. 10, no. 2 (1997), pp. 1–25. See p. 16.
Shah, “The Option Clause,” p. 13; Checkland, Scottish Banking, pp. 184–186; and Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, vol. 1 (Indianapolis, IN: Liberty Fund, 1979 [1776]), p. 325.
For some examples, see Selgin, The Theory of Free Banking, pp. 54–56 and 66–67 and Roger W. Garrison, “Central Banking, Free Banking, and Financial Crises,” The Review of Austrian Economics vol. 9, no. 2 (1996), pp. 109–127. See in particular pp. 111, 113, 117, 118, and 125 of the latter reference.
See Salsman, Gold and Liberty, pp. 33 and 35 and Robert G. King and Charles I. Plosser, “Money, Credit, and Prices in a Real Business Cycle,” The American Economic Review vol. 74, no. 3 (June 1984), pp. 363–380 for examples. For the latter reference, see in particular pp. 368, 370, 372, and 374–376.
Brian P. Simpson, Trade Cycle Theory: A Market Process Perspective (Ann Arbor, MI: Bell & Howell Information and Learning Company, 2000), pp. 94–95.
See Jeremy Atack and Peter Passell, A New Economic View of American History, 2nd ed. (New York: W. W. Norton & Company, 1994), p. 502
and Richard H. Timberlake, Jr., “The Central Banking Role of Clearinghouse Associations,” Journal of Money, Credit, and Banking vol. 16, no. 1 (February 1984), pp. 1–15 for discussions of lending by clearinghouses during financial crises. See pp. 13 and 14 of the latter source.
Lawrence H. White, The Clash of Economic Ideas (Cambridge: Cambridge University Press, 2012), pp. 89–90 and 95–97.
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© 2014 Brian P. Simpson
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Simpson, B.P. (2014). Government Interference, Fiat Money, and Fractional-Reserve Banking. In: Money, Banking, and the Business Cycle. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137336569_5
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