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
• 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)
• 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)
• 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]Responses and Critiques
  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]

   

• 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]