Stay In The Closet About Fractional Reserve and Free Banking

From: XYZ
Sent: Tuesday, March 26, 2019 12:25 PM
Subject: George Mason University Austrians vs. Rothbardians

Dr. Block,

My name is XYZ. I have been accepted into GMU’s graduate economics program, which, in my view, have faculty and facilities (Mercatus Center) that are Austrian friendly. Nevertheless, I recall that ABC and quite a few other GMU Austrians are advocates of free-banking, not 100 percent gold reserve banking. My question: given that Mises, Rothbard, and Hoppe have defended 100 percent gold reserve banking, why do free-bankers hold their position? Do they not understand that fractional reserve banking is the essence of the boom/bust cycle?

Thanks for your time.

Cordially, XYZ

Dear XYZ:

Why do they favor fractional reserve banking (FRB) and free banking? I don’t know their motives. I suspect it is an honest disagreement. All I know is that they are mistaken. Below, see a biblio on this issue.

Want some free advice? Stay in the closet.  Do not challenge any of your free-banking professors. You are there not to convert them, but, rather, to get a phd. So, try not to take their classes. But, if you do, shut up, take notes, and regurgitate on exams what they tell you. Sorry to be so paranoid, but this advice stems from my own days as a student.

Pay attention to what your professors say. If staying in the closet is too rough for you, write a blistering attack on their pro FRB and free banking views. Then, publish it right after you get your phd. Or, do it right away, but anonymously. But do so only if this does not unduly take time away from your studies. To repeat: your job for the next few years is the GET THAT PHD!

Probably, I am being too paranoid. Possibly, all the professors there are honorable, and will not take the slightest umbrage at you for disagreeing with them. I don’t mean to single out these professors at Mason.  But, it is only human nature for professors at any university to resent students who sharply disagree with them. I pride myself on not being like that. But, I, too, am human (some of my critics might disagree with this contention of mine). I strive mightily not to be like that. But, who knows? Maybe, I, too, am biased in this way, despite my strong efforts to overcome this bit of human nature.

Alternatively, go get your phd from Jesus Huerta de Soto or Guido Huelsmann instead, in Spain and/or France. They are both solid on this FRB question.

Here’s that biblio:

I. Anti Fractional reserve banking  frb::

Baxendale (2010) is a report on a series of interview which demonstrate that the common man is ignorant of banking, not to mention the fractional reserve aspects of it: Baxendale, Toby. 2010. “Public attitudes to banking.” June 15;

Bagus, 2003; Bagus, Howden and Block, 2013; Barnett and Block, 2005, 2008, 2009; Baxendale, 2010; Block, 2008; Block and Caplan, 2008; Block and Garschina, 1996; Block and Humphries, 2008; Block and Posner, 2008; Davidson, 2008; Davidson and Block, 2011; Hanke, 2008; Hazlitt, 1979; Hollenbeck, 2013, 2014; Hoppe, 1994; Hoppe, Hulsmann and Block, 1998; Howden, 2013; Huerta de Soto, 1995, 1998, 2001, 2006, 2010, 2018; Hulsmann, 1996, 2000, 2002a, 2002b, 2003, 2008; Murphy, 2010; North, 2009; Polleit, 2010; Reisman, 1996, 2009; Rothbard, 1975; 1990, 1991, 1993; Salerno, 2010A, 2010B, 2011.

Bagus, Philipp. 2003, ‘The Commons and the Tragedy of Banking’, November 12,

Bagus, Philipp, David Howden and Walter E. Block. 2013. “Deposits, Loans and Banking: Clarifying the Debate,” American Journal of Economics and Sociology, Volume 72, Issue 3, pages 627–644, July;;

Barnett, William II and Walter E. Block. 2005. “In defense of fiduciary media— a comment; or, what’s wrong with “clown” or play money?” Quarterly Journal of Austrian Economics; Vol. 8, No. 2, Summer, pp. 55-69;

Barnett, William and Walter E. Block. 2008. “Time deposits, dimensions and fraud,” Journal of Business Ethics;;;

Barnett, William and Walter E. Block. 2009. “Financial Intermediaries, the Intertemporal-Carry Trade, and Austrian Business Cycles; or; Crash and Carry: Can Fraudulent Time deposits lead to an Austrian Business Cycle? Yes.” Journal Etica e Politica / Ethics & Politics; Vol. XI, No. 1, pp. 455-469;

Baxendale, Tony. 2010. Free Banking, the Balance Sheet and Contract Law Approach; March 15;

Block, Walter and Bryan Caplan. 2008. “Walter E. Block  versus Bryan Caplan on Fractional Reserve Banking.” Nov 1;

Block, Walter and Kenneth M. Garschina. 1996. “Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homoginization Process,” Review of Austrian Economics, Vol. 9, No. 1, 1995, pp. 77-94;

Block, Walter and John Humphries. 2008. “Humphries vs Block on fractional reserve banking.” November 17;

Block, Walter versus Eric Posner. 2008. “Posner vs. Block on fractional reserve banking.” November, 29;

Davidson, Laura. 2008. “Fractional Reserve Banking Is Indeed Fraudulent,” November 17;

Davidson, Laura and Walter E. Block. 2011. “The Case Against Fiduciary Media: Ethics Is The Key,” The Journal of Business Ethics. Vol. 98, Issue 3, pp. 505-511;;; 10.1007/s10551-010-0590-2

Hanke, Steve. 2008. “Banking Crises: Plus Ça Change…” GlobeAsia, November, pp. 168-169;–Plus%20%C3%87a%20Change,%20November%202008.pdf

Hazlitt, Henry. 1979. “Gold versus Fractional Reserves Part 1 .” The Freeman. May;

Hollenback, Frank. 2013. “Insuring Deposits, Ensuring Insolvency.” July 24;

Hollenback, Frank. 2014. “The Fraud in Fractional Reserve Banking.” November 26;

Hoppe, Hans-Hermann. 1994. “How is Fiat Money Possible? or, The Devolution of Money and Credit,” Review of Austrian Economics, 7(2), pp. 49-74.

Hoppe, Hans-Hermann, with Guido Hulsmann and Walter E. Block. 1998. “Against Fiduciary Media,” Quarterly Journal of Austrian Economics, Vol. 1, No. 1, pp. 19-50,

Howden, David. 2013. “A Simple Math Question for Bankers.” December 28;;

Huerta de Soto, Jesús. 1995. “A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian Perspective,” Review of Austrian Economics, 8(2), pp. 25-38.

Huerta de Soto, Jesús. 1998, ‘A Critical Note on Fractional-Reserve Free Banking’, The Quarterly Journal of Austrian Economics 1(4), 25-49.

Huerta de Soto, Jesús. 2001. “A Critical Note on Fractional Reserve Free Banking,” The Quarterly Journal of Austrian Economics, Vol. 1, No. 4, Fall, pp. 34-35

Huerta de Soto, Jesús. 2006. Money, Bank Credit and Economic Cycles (Ludwig von Mises Institute, Auburn AL.)

Huerta de Soto, Jesús. 2010. “Economic Recessions, Banking Reform, and the Future of Capitalism.”

Huerta de Soto, Jesús. 2018. “What Free-Banking Advocates Get Wrong.” February 26;

Hülsmann, Jorg Guido. 1996, ‘Free Banking and the Free Bankers’, Review of Austrian Economics 9(1), 3-53.

Hulsmann, Jorg Guido. 2000. “Banks Cannot Create Money”, The Independent Review: A Journal of Political Economy, vol. 5, no. 1, summer, 101—110;

Hulsmann, Jorg Guido. 2002a. “Free Banking and the Free Bankers.” Review of Austrian Economics. Vol. 9, No. 1. pp. 3-53;

Hulsmann, Jorg Guido. 2002b. “Free Banking Fractional Reserves: Reply to Pascal Salin.” Review of Austrian Economics, Vol. 1, No. 3.

Hulsmann, Jorg Guido. 2003. “Has Fractional-Reserve Banking Really Passed the Market Test?,” Independent Review 7/3, Winter, 399-422.

Hülsmann, Jorg Guido. 2008. The Ethics of Money Production Auburn AL: Ludwig von Mises Institute

Murphy, Robert P. 2011.  The Fractional-Reserve Banking Question.” June 14;

North, Gary. 2009. “What Is Money? Part 5: Fractional Reserve Banking.” October 10;

Polleit, Thorsten. 2010. “The Faults of Fractional-Reserve Banking.” December 23;

Reisman, George. 1996. Capitalism. Ottawa, Il.: Jameson Books; pp. 954-963

Reisman, George. 2009. “A Pro-Free-Market Program for Economic Recovery,” November 20;

Rothbard, Murray N.  [1963] 1975. America’s Great Depression (Sheed and Ward, Kansas City).

Rothbard, Murray N. 1990. What Has Government Done to Our Money?, Auburn, AL: Ludwig von Mises Institute;

Rothbard, Murray N. [1962] 1991. “The Case for a 100 Percent Gold Dollar,” In Search of a Monetary Constitution, Leland B. Yeager, ed., Cambridge, MA: Harvard University Press, pp. 94-136, and Auburn, AL: Ludwig von Mises Institute. See also “The Logic of Action One” pp. 364-384;;

Rothbard, Murray N.  [1962] 1993. Man, Economy, and State. Ludwig von Mises Institute, Auburn, AL

Rothbard, Murray N. 1988.  The Myth of Free Banking in Scotland,  Review of Austrian Economics;

Salerno, Joseph T. 2010A.  Money, Sound and Unsound. Auburn, Ludwig von Mises Institute

Salerno, Joseph T. 2010B. “White contra Mises on Fiduciary Media,” May 14;

Joseph T. Salerno. 2011. “Dr. Joseph Salerno Explains Everything You Ever Wanted to Know About Money (But Were Afraid to Ask)”, The Daily Bell, July 3;

Dr. Joseph Salerno Explains Everything You Ever Wanted to Know About Money (But Were Afraid to Ask)

II. pro frb:

Horwitz, 2010; Horwitz and Bodenhorn, 1994; McElroy, 2013, 2014; Rozeff, 2010; Sechrest, 1987, 1989a, 1989b, 1991a, 1991b, 1993, 2007; Selgin, 1994, 1998, 2007A, 2007B, 2007C; Selgin and White, 1996; White, 1992, 1995, 1999, 2003, 2007A, 2007B, 2007C

Horwitz, Steven and Howard Bodenhorn. 1994.  “A Property Rights Approach to Free Banking,” Journal des Economistes et des Etudes Humaines, 5 (4), December, pp. 505-519.

Horwitz, Steven. 2010. “My Teenage Daughter Gets Fractional Reserve Banking.” January 11;

McElroy, Wendy. 2013. “Fractional-Reserve Banking: Not Fraud, Not Folly.” May 13;

McElroy, Wendy. 2014. “Fractional-Reserve Banking is Not Fraud.” November 13;

Fractional-Reserve Banking is Not Fraud

Rozeff, Michael S. 2010. “Rothbard on Fractional Reserve Banking: A Critique,”

The Independent Review, Vol. 14, No. 4, Spring, pp. 497-512

Sechrest, Larry. 1987. “White’s Free Banking Thesis: A Case of Mistaken Identity,” Review of Austrian Economics, November, Vol. II, 247-57.

Sechrest, Larry. 1989a. Review of George Selgin’s The Theory of Free Banking, Journal of Economics, Vol. XV, 196-98.

Sechrest, Larry. 1989b. “Free Banking vs. Central Banking: A Geometrical Analysis,” South African Journal of Economic and Management Sciences, November, Vol. II, 83-97.

Sechrest, Larry. 1991a. “Free Banking in Scotland: A Dissenting View,” Cato Journal, Winter, Vol. 10, No. 3, 799-808.

Sechrest, Larry. 1991b. “Banking, Central and Free”, pages 145-51, Magill’s Survey of Social Science: Economics, Salem Press.

Sechrest, Larry. 1993. Free Banking: Theory, History, and a Laissez-Faire Model, Westport, Connecticut: Quorum Books.

Sechrest, Larry. 2007. “Free Banking Basics,” The Free Radical, July/August, Vol. 76, 40-41.

Selgin, George. 1994. “Free Banking and Monetary Control.”  Economic Journal 104: 1449-59.

Selgin, George. 1998. The Theory of Free Banking: Money Supply under Competitive Note Issue.  Totowa, New Jersey:  Rowman & Littlefield

Selgin, George. 2000. “Should We Let Banks Create Money?” The Independent Review, v.V, n.1, Summer, pp. 93–100

Selgin, George. 2007A. “Is fractional-reserve banking inflationary?” January 23. Free Market News Network;

Selgin, George. 2007B. “Notes on free banking: fractional reserves and economic development, part I” February 14. Free Market News Network;

Selgin, George. 2007C. “Notes on free banking: fractional reserves and economic development, part II” February 15. Free Market News Network;

Selgin, George A., and White, Lawrence H. 1996. “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics, Vol. 9, No. 2, pp. 83-107;

White, Lawrence H. 1992. Competition and Currency: Essays on Free Banking and Money. New York: New York University Press

White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience, and Debate, 1800-1845, 2nd ed. London: Institute of Economic Affairs

White, Lawrence H. 1999. The Theory of Monetary Institutions. Oxford: Basil Blackwell

White, Lawrence H. 2003.  “Accounting for Fractional-Reserve Banknotes and Deposits,” Independent Review 7/3, Winter, 423-41.

White, Lawrence H. 2007A. “Huerta de Soto’s Case Against Fractional Reserves,” Free-Market News Network (08 Jan)

White, Lawrence H. 2007B.  “Huerta de Soto’s View of the History of Banking,” Free-Market News Network (30 Jan)

White, Lawrence H. 2007C. “Huerta de Soto on Attempts to Justify Fractional-Reserve Banking,” Free-Market News Network (05 Feb)

III. Larry White and I disagree as to how to categorize these, so, at his suggestion, I’m creating a third or “ambivalent” section

Ambivalent. These are of interest but there is some question as to on which side they lie:

Callahan, 2003; van den Hauwe, 2006, 2008;  Williams, 1984.

Callahan, Gene. 2003. “The Libertarian Case Against Fractional-Reserve Banking,”, July 22

van den Hauwe, Ludwig. 2006. “The Uneasy Case for Fractional-Reserve Free Banking, Procesos de Mercado, Vol. III, No. 2, pp143-96;

van den Hauwe, Ludwig. 2008, forthcoming. “Credit Expansion, the Prisoner´s Dilemma, and Free Banking as Mechanism Design, Procesos de Mercado,

Williams, Jeffrey C. 1984. “Fractional Reserve Banking in Grain,” Journal of Money Credit and Banking. 16 (4): pp. 488-496


7:12 am on July 25, 2019