Economics

"THE DISCUSSION OF WHAT IS and what is not inflation has become important among the Austrian economists in their debate regarding free banking with fractional reserves versus banking with 100-percent reserve. That such an old and important discussion has not yet reached a consensus is interesting and suggests that there may be a problem or ambiguity around this concept.
Many Austrians also turn to the writings of Ludwig von Mises to find out what he himself considered to be inflation. The main intention is to find out if, in either system, free banking with fractional reserves or a 100-percent reserve, there could be cases of free market inflation. In particular, does any
change in the quantity of money (in the broad sense) imply inflation? Is it inflationary for the banking system to expand the quantity of fiduciary media even when there has been an increase in the demand to hold money in the broader sense?"

This article studies the difficulties of the argument that Hayekian spontaneous orders can be modeled using game theory and thus help integrate the Austrian School of economics with more mainstream economic schools of thought. I posit that there are central aspects of Hayekian spontaneous orders that cannot be fully incorporated into game theory.

This article studies the main aspects of free banking to put forward the argument that such a system is endogenously stable and that financial crisis is an exogenous phenomenon. In support of this conclusion, it analyzes the cases of bank runs, concerted expansion and how free banking would affect business cycles according to different schools of thought. The article concludes that money can efficiently be a market phenomenon outside the state.

To analyze the feasibility of applying the Coase Theorem, this article uses two traditional arguments, economic calculation and
non-neutral effects, found in the Austrian literature. This article argues that the efficiency calculation a judge undertakes is problematic and that his decision should not be considered neutral with respect to the general equilibrium (even with zero transaction costs). These problems imply serious challenges to the application of the Coase Theorem.

In Time Deposits, Dimension, and Fraud (2009), William Barnett and Walter Block argue that by borrowing short and lending long there is an over issuance of property rights. Their article, however, does not fully extend the consequences of their contribution. Once this is done, it becomes clearer that their argument suits a great impediment to banking, becoming a possible reason to support rather than to oppose fractional reserve banking. Bagus and Howden (J Bus Ethics 90(3):399–406, 2009) comment on Barnett and Block (J Bus Ethics 88(4):711–716, 2009), the authors claim that while maintaining the illegitimacy of fractional reserve deposits, borrowing short and lending long it is actually not illegitimate. An extension on Bagus and Howden (2009) will show that their line of argumentation can be applied as a defense of fractional reserve banking as well.

The interpretation that Mises preferred banking with a 100% reserve requirement finds strong support in Huerta de Soto’s Money, Bank Credit, and Economic Cycles. This article seeks to review his arguments concluding that it is in fact more feasible to interpret that Mises preferred free banking with fractional reserves to the 100% reserve requirement.