Quarterly Journal of Austrian Economics
Credit Creation or Financial Intermediation?: Fractional-Reserve Banking in a Growing Economy
Volume 2, No. 3 (Fall 1999)
It is important that Austrians continue in their endeavor to convince colleagues, policymakers, and the public about the instabilities inherent to a fractional-reserve system. Austrians need to remember that economics fluctuations can have other causes. Other approaches may be complementary to the Austrian approach. Monetary disequilibrium can be the source of a contraction and may be essential in modeling the adjustment process in the recession period (the Hayekian secondary deflation). Real business cycle theory should remind Austrians that real shocks do occur and markets do adjust. Credit creation and malinvestment could complement real business cycle research, which has difficulty explaining satisfactorily why downturns occur. A technology shock accompanied by credit creation, however, has elements of healthy growth and unhealthy growth. Austrian business cycle theory can augment real business cycle theory by explaining both the boom and the necessary correction.