Thursday, August 15, 2013

Fractional Reserve Banking is Inherently Unsustainable without Government Privilege

That is the thesis of this provocative lecture by Joe Salerno at the most recent Mises University.

Salerno explains how the Fed manipulates the entire money creation process as the central bank and then commercial banks make money out of nothing.

In my book, Foundations of Economics, I make the case that fractional reserve banking is inherently inflationary and generates the business cycle. Building on the monetary theory of Ludwig von Mises, Murray Rothbard, and Jesus Heurta de Soto, I explain how, in a fractional reserve setting (especially if it is backed by a central bank) increases in bank reserves are multiplied leading to increased prices, a decreasing purchasing power, and artificially lower interest rates that induce capital malinvestment and its consequential recession.

For those who want more, I highly recommend the collection of his writings on monetary theory and policy, Money Sound and Unsound. It is even available for no charge in pdf format.

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