Quarterly Journal of Austrian Economics

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Fractional Reserve Banking: Some Quibbles

  • The Quarterly Journal of Austrian Economics

Tags Money and BanksMoney and Banking

07/30/2014Philipp BagusDavid Howden

Volume 13, Number 4 (Winter 2010)


We explore several unaddressed issues in George Selgin’s (1988) claim that the best monetary system to maintain monetary equilibrium is a fractional reserve free banking one. The claim that adverse clearing balances would limit credit expansion in a fractional reserve free banking system is more troublesome than previously reckoned. Both lengthened clearing periods and interbank agreements render credit expansion unrestrained. “The theory of free banking” confuses increases in money held with increases in real savings, resulting in exacerbated economic cycles when fiduciary media is issued equally under both scenarios. Most troubling, these economic cycles generated by the free banking system breed an incentive to create a  coordinating agent serving as a lender of last resort. The central bank is demonstrated to be a natural, if not unavoidable outgrowth of the fractional reserve free banking system.


Contact Philipp Bagus

Philipp Bagus is professor at Universidad Rey Juan Carlos. He is a Fellow of the Mises Institute, an IREF scholar, and the author of numerous books including In Defense of Deflation and The Tragedy of the Euro, and is coauthor of Blind Robbery!, Small States. Big Possibilities.: Small States Are Simply Better!, and Deep Freeze: Iceland's Economic Collapse.

Contact David Howden

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, and Academic Vice President of the Ludwig von Mises Institute of Canada.

Cite This Article

Bagus, Phlipp, and David Howden. "Fractional Reserve Free Banking Some Quibbles." The Quarterly Journal of Austrian Economics 13, No. 4 (Winter 2010): 29–55.

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