Full Reserve Banking

Introduction

In his work Una crítica a la teoría monetaria de Mises, Juan Ramón Rallo (2019) criticizes Ludwig von Mises’s monetary theory as developed in Mises’s (1953) Theory of Money and Credit. While Rallo criticizes Mises, he dedicates his book to Antal Fekete, whom he congratulates for having advanced Austrian monetary theory (7).

In this contribution I want to show that Rallo and Fekete do not advance Austrian monetary theory but rather defend an idiosyncratic variant of the banking school.

I will give support to Jesús Huerta de Soto’s (2014, 235) claim that Rallo’s theory is neither new nor Austrian. I will show that the approach of the neo–banking school suffers from the same shortcomings as the traditional banking school, most importantly the lack of consideration of capital theory (Huerta de Soto 2014).

In order to deal with the pertinent issues, we have to go back to some basics or essentials of economic theory and develop them. During the course of the book, I will touch on the nature of money, the ideal money, real savings, the demand for money, falling prices, what the interest rate reflects and how it is determined, and so on.

In section 1, I will present Rallo’s theory as a variant of the classical banking school. In section 2, I will ask what an ideal money is, analyze the reasons that Rallo presents in favor of an elastic money supply, and inquire whether price deflation is a problem. In section 3, I will present classic critiques of the real bills doctrine, which to some extent are also applicable to Rallo’s banking theory. Next, in section 4, our main section, I will put forward an Austrian critique of Rallo’s theory showing that the system defended is prone to cause business cycles. In this context, I will emphasize the role of real savings in investment and review the essence of fiduciary media. In section 5, I will show that contra Rallo maturity mismatching is not the genuine cause of the business cycle and need not be destabilizing but can be dynamically efficient. Finally, in section 6, I will mention some specific points in Rallo’s work where I believe that there are misunderstandings or misconceptions regarding Mises’s opus.

I would like to thank Bernardo Ferrero, Jesús Huerta de Soto, Guido Hülsmann, Christoph Klein, Adrián Rodríguez, and the participants in the sixth Madrid Conference on Austrian Economics for helpful comments. All remaining errors are mine.

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Citations of Rallo without a cited year are to his 2019 work. Translations of Rallo (2019) are by the author.