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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:

Main debate:

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

Subsequent/other blog discussions and articles:

Lawrence White, “Ludwig von Mises’s The Theory of Money and Credit at 101” (January, 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.” []
{ 3 comments… add one }
  • 1 November 8, 2019, 5:15 pm

    Ever notice Selgin contradicts himself?

    Fractional is non-misesian
    Then it is misesian

    He argues on that 2nd piece in complete irrelevance to Mises’ criticism over supply too

    It is also incorrect when we recall what neomonetarism is, Freidman going further than White yet holding to simple coexistent fiat

    Freebanking was G/S. Fractional in his sense might or not include BTC but hardly precludes fiat simply in that fiduciary itself isnt fiat

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