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George Selgin to Paul Krugman: "I Am a Former Austrian and I Do Believe in Fractional Reserve Banking -- Honest"


Well, not exactly his words, but this was the gist of George's bizarre and irrelevant comment on Krugman's column asking Austrians what their position is on money market mutual funds. In his haste to establish his mainstream bona fides to Krugman, however, George was blind to the fact that Krugman has been forced to recognize and address Austrian arguments precisely by those who George denigrates in his comment as "the anti-fractional reserve crowd among self-styled Austrians, taking its lead from Murray Rothbard." But it was due to the prodigious efforts of the Rothbardians including and especially Ron Paul that we have begun to see a radical change of opinion among the public, the establishment media, finance professionals, and even some academic economists concerning the alleged beneficence of the Fed and the effectiveness of conventional macroeconomic policies. It was this challenge that worries Krugman and prompted his insipid column. He could care less about George's support for fractional-reserve banking and would not bat an eye even if he knew that George supported QE1 and (maybe) QE2 and advocates an aggregative nominal income target for Fed monetary policy, albeit at a lower level than most contemporary macroeconomists are comfortable with.

One more point: Both Rothbard and Krugman would have had a good belly laugh together over George's peculiar notion that, in the absence of a central bank and government deposit insurance, a fractional-reserve banking system would be stable and flourish on a free market.

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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