The Great Fractional Reserve/Freebanking Debate

Back in the 1990s there was a fascinating debate carried on among various Austrians, mostly in the pages of the Review of Austrian Economics (RAE) or Quarterly Journal of Austrian Economics (QJAE), on the issue of fractional-reserve banking and so-called free banking. On the one hand were Rothbardians such as Hoppe, Hülsmann, Huerta de Soto, and Salerno; on the other, supporters of freebanking such as Selgin, White, Dowd, and Horwitz. The Rothbardians believe fractional-reserve banking is unstable and fraudulent; the free bankers disagree. My own take is that the Rothbardians are right on the economics, although I think the fraud charge could be obviated with sufficient warnings to customers and recipients of FRB notes.

I’ve compiled below a chronological listing of these pieces, and a few other works, with links to online versions, where available, for those who feel like reading up on this interesting issue. This is basically a (skeletal) ebook.

If anyone is aware of any significant material I have omitted, please let me know.

Update: I’ve combined most of the “main debate” and “subsequent discussion” files into a single PDF.

Background material:

• Mises, The Theory of Money and Credit (1912) and Human Action (1949)
• Rothbard, The Mystery of Banking (1983/2008) and The Case for a 100 Percent Gold Dollar (1962) and “The Case for a Genuine Gold Dollar”, 1985
• “The Gold Standard and Fractional-Reserve Banking”, Joe Cobb, September 1975 [in retrospect: this is a very weak and amateurish article]
• “Gold versus Fractional Reserves”, Henry Hazlitt, May 1979
• “Gold and Free Market Banking” (video), Lawrence H. White, “The Gold Standard: An Austrian Perspective” Conference held in Washington, DC, November 16-17, 1983
• Lawrence H. White, Free Banking in Britain: Theory, Experience, and Debate, 1800–1845 (1984) and Competition and Currency: Essays on Free Banking and Money (1989/1992)
  • Rothbard, The Myth of Free Banking in Scotland, RAE (1988)
  • Larry J. Sechrest, White’s Free-Banking Thesis: A Case of Mistaken Identity, RAE (1988)
• George Selgin, The Theory of Free Banking (1988)
  • Joseph T. Salerno, Mises and Hayek Dehomogenized, RAE, Vol. 6, No. 2 (1993)
  • Selgin, “Legal Restrictions, Financial Weakening, and the Lender of Last Resort,” Cato J. (Fall 1989)
• Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” in Man, Economy and Liberty: Essays in Honor of Murray N. Rothbard (1988)
• Morris J. Markovitz,  “Fractional versus 100% Reserve Banking”,  The Freeman (June 1988)
• Steven Horwitz, Monetary evolution, free banking, and economic order (1992)
• Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (1993)
  • Review by John Cochran [this review is mostly pointless and can be omitted]
• Kevin Dowd, Laissez Faire Banking (1993)

Main debate:

• Hans-Hermann Hoppe, How is Fiat Money Possible? or, The Devolution of Money and Credit, RAE, Vol. 7, No. 2 (1994) (reprinted as ch. 6 of Hoppe’s Economics and Ethics of Private Property)
• Jesús Huerta de Soto, A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian Perspective, RAE, Vol. 8, No. 2 (1995)
• Jörg Guido Hülsmann, Free Banking and the Free Bankers, RAE, Vol. 9, No. 1 (1996)
• Walter Block & Kenneth Garshchina, Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process, RAE, Vol. 9, No. 1 (1996)
• George A. Selgin & Lawrence H. White, In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are Misesians!, RAE, Vol. 9, No. 2 (1996)
• Parth J. Shah, The Option Clause in Free-Banking Theory and History: A Reappraisal, RAE, Vol. 10, No. 2 (1997)
• Hoppe, with Hülsmann & Block, Against Fiduciary Media, QJAE, Vol. 1, No. 1 (1998) (reprinted as ch. 7 of Hoppe’s Economics and Ethics of Private Property)
• Pascal Salin, Free Banking and Fractional Reserves: A Comment, QJAE, Vol. 1, No. 3 (1998)
• Hülsmann, Free Banking and Fractional Reserves: Response to Pascal Salin, QJAE, Vol. 1, No. 3 (1998)
• Huerta de Soto, A Critical Note on Fractional-Reserve Free Banking
  (1998)
• “Why Private Banks and Not Central Banks Should Issue Currency, Especially in Less Developed Countries”, Lawrence H. White and George Selgin, April 19, 2000
• “Should We Let Banks Create Money?”, George Selgin, Summer, 2000
• “Banks Cannot Create Money”, Jorg Guido Hulsmann, Summer 2000
• Jeffrey M. Herbener, Ludwig von Mises on the Gold Standard and Free Banking, QJAE, Vol. 5, No. 1 (2002)
• White, Accounting for Fractional-Reserve Banknotes and Deposits—or, What’s Twenty Quid to the Bloody Midland Bank?, Independent Review (Winter 2003)
• Hülsmann, Has Fractional-Reserve Banking Really Passed the Market Test? Independent Review (Winter 2003)
• “Legal Tender Laws and Fractional-Reserve Banking”, Jorg Guido Hulsmann, Summer 2004
• “Hayek’s Plan for Private Money”, Robert P. Murphy, July 18, 2005

Three books that came out after the initial debate had mostly died down:

• Huerta de Soto, Money, Bank Credit, and Economic Cycles (2006)
• Hülsmann, The Ethics of Money Production (2008)
• ——, Theory of Money and Fiduciary Media (2012), including esp.
  • “Ludwig von Mises as Currency School Free Banker,” by Joseph T. Salerno, and
  • “The Inter-Bank Market in the Perspective of Fractional Reserve Banking,” by Nikolay Gertchev

Subsequent/other blog discussions and articles:

• Lawrence H. White, “Mises on Free Banking and Fractional Reserves,” in Mark Robbins and Mark Spangler, eds., A Man of Principle: Essays in Honor of Hans F. Sennholz (1992)
• Lawrence H. White, “Why Didn’t Hayek Favor Laissez Faire in Banking?” (1999)
• Ludwig Van Den Hauwe, “The Uneasy Case for Fractional-Reserve Free Banking,” Procesos de Mercado: Revista Europea de Economía Política, Vol. III, n.^o2 (Otońo [Fall] 2006)
• Jeffrey Rogers Hummel, “Why Fractional Reserve Banking Is More Libertarian than the Gold Standard” (FEE lecture, July 15, 2008; audio) (see Hummel’s description here)
• Block, Walter Block versus Bryan Caplan on Fractional Reserve Banking, LewRockwell.com (Nov. 1, 2008)
• Block, Is Fractional Reserve Banking Fraudulent?, LewRockwell.com (Nov. 6, 2008)
• “100 Percent Reserve Money: The Small Change Challenge”, George Selgin, March 2009
• “The Case Against the Fed Book Review”, Randy Radic (May 19, 2009)
• Kinsella, Fractional-Reserve Banking, Contracts of Deposit, and the Title-Transfer Theory of Contract (Aug. 12, 2009)
• Peter Boettke, Mises and Free Banking — Why Is There a Debate?, Coordination Problem blog [formerly Austrian Economists blog] (May 7, 2010)
• Joe Salerno, Auction Markets and Optimally Sticky Prices (Aug. 25, 2009)
• Kinsella, My comments on Steve Horwitz’s “Mises and His (Apparent) Call for 100% Reserves” (Sept. 4, 2009)
• Steve Horwitz, comment on Boettke (May 7, 2010)
• Salerno, Selgin Contra Horwitz and White on Mises’s View of Fiduciary Media, Mises Blog (March 16, 2010)
• Bagus, Philipp and David Howden (2010), “Fractional Reserve Free Banking: Some Quibbles“. Quarterly Journal of Austrian Economics 13, no. 4: 29–55.
  • ——, Unanswered Quibbles with Fractional Reserve Free Banking, Libertarian Papers 2011
• Selgin, 100 Percent Reserve Money: The Small Change Challenge, QJAE, Vol. 12, No. 1 (2009)
• Mark Thornton, Short Changing 100 Percent Reserves, QJAE, Vol. 13, No. 2 (2010)
• William N. Butos, Monetary Orders and Institutions: A Hayekian Perspective, QJAE, Vol. 15, No. 3 (Fall 2012)
• Philipp Bagus, Austrian Business Cycle Theory: Are 100 Percent Reserves Sufficient to Prevent a Business Cycle?, Libertarian Papers, Vol. 2 (2010)
• Philipp Bagus & David Howden, “Deposits, Loans, and Banking: Clarifying the Debate,” American Journal of Economics and Sociology 48 (2013)¹
• Selgin, “Hayek and Free Banking” (2015)
  • Salerno, Selgin on Hayek on Free Banking (2015)
• FRB Debate — George Selgin & Robert Murphy — My Debate With George Selgin on Fractional Reserve Banking (April 2018)
• Robert Murphy, Why Fractional Reserve Banking Poses a Threat to Market Stability, Mises Wire (May 4, 2018)
• ————, More Than Quibbles: Problems with the Theory and History of Fractional Reserve Free Banking, QJAE (Spring 2019)
• Sammy Cartagena, “Could Blockchain Technology Help End Fractional Reserve Banking?“, Mises Wire (Jan. 29, 2022)
• Kinsella, On Coinbase, Bitcoin, Fractional-Reserve Banking, and Irregular Deposits (July 12, 2022)
• Stephan Livera “In Defense of Bitcoin Full Reserve: Not Anti-Credit, but Anti-Fiduciary Media,” Bitcoin Magazine (July 28, 2022)

Lawrence White, “Ludwig von Mises’s The Theory of Money and Credit at 101” (January, 2014):

• Lead Essay: Lawrence H. White, “Ludwig von Mises’s The Theory of Money and Credit at 101” [Posted: Jan. 7, 2014]
• 1. Jörg Guido Hülsmann, “Mises and His First-Best Option” [Posted: Jan. 8, 2014]
  2. Jeffrey Rogers Hummel, “Mises, the Regression Theorem, and Free Banking” [Posted: Jan. 10, 2014]
  3. George Selgin, “Mises Was Lukewarm on Free Banking” [Jan. 12, 2014]Responses and Critiques
• The Conversation
  1. Lawrence H. White, “A Response to Hülsmann, Hummel, and Selgin” [Posted: Jan. 15, 2014]
  2. Jörg Guido Hülsmann, “What Mises Said” [Posted: Jan. 16, 2014]
  3. George Selgin, “Reading off the Page” [Posted: Jan. 16, 2014]
  4. Jeffrey Rogers Hummel, “Fractional Reserve Banking and Austrian Business Cycle Theory”[Posted: Jan. 27, 2014]
  5. Lawrence H. White, “Further Remarks on Hülsmann and Hummel” [Posted: Jan. 27, 2014]
  6. George Selgin, “The Demand for Money Also Matters” [Posted: Jan. 28, 2014]
  7. Jörg Guido Hülsmann, “On the Stabilizing Effects of Fractional-Reserve Banking” [Posted: Jan. 31, 2014]
  8. Jeffrey Rogers Hummel, “Reply to George Selgin on Austrian Business Cycle Theory” [Posted: Feb. 6, 2014]
  9. George Selgin, “Unhelpful Labels: Reply to Hummel” [Posted: Feb. 7, 2014]

1. Abstract: “The relationship between banking deposits and loans remains a contentious topic. While the defense of a 100 percent reserve clause to eliminate fractional reserves has commonly been asserted on economic and ethical grounds, new legal arguments found in Jesús Huerta de Soto (2006) remain largely ignored. We address Michael S. Rozeff’s (2010) recent article as a case in point of this ignorance. Contrary to supporters of fractional reserve demand deposits, we show that such a contract – one treating a loan and a deposit interchangeably – is impermissible due to both established and a priori legal principles. At best, a fractional reserve demand deposit contract may be considered an aleatory contract. Based on an uncertain future event, we find this type of contract wholly incompatible with the reason individuals hold money – the mitigation of uncertainty. Despite what defenders of fractional reserve banking claim, deposit and loan contracts are distinct, and may not be contractually melded together.” [↩]