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Source link: http://archive.mises.org/10012/correcting-quiggin-on-austrian-business-cycle-theory/

Correcting Quiggin on Austrian Business-Cycle Theory

May 25, 2009 by

Because of the popularity of the Austrian message mainstream economists are taking the time to explain why (in their opinion of course) the Mises-Hayek theory is nonsense. In the past I’ve answered Tyler Cowen and Paul Krugman’s objections, but today’s focus will be the recent critique penned by Australian economist John Quiggin. Quiggin’s piece deserves careful scrutiny. In the interest of brevity, I am going to dive right into his objections. FULL ARTICLE


Michael A. Clem May 26, 2009 at 9:57 am

My apologies–I kept writing Quiggan, when it should have been Quiggin.

newson May 26, 2009 at 10:23 am

to professor horwitz:
hmm, well i think you are mistaken in assuming a consensus amongst the austrian fraternity that inflation is the root cause of the abc. i would refer you to hulsmann’s paper on error cycles which exposes the flaw in this reasoning.

dewind May 26, 2009 at 10:27 am

Fraction Reserve Banking is interesting dilemma for those of us that follow the school of Austrian economics. The fear is that if FRB exists it will inevitably lead to government intervention and the creation of a central authority via capitalizing on isolated bank crises.

FRB on its own — without government — is not necessarily fraudulent so long as the consumer understands the bank practices FRB. They should understand the reserve ratios and the risk involved in investing in such a bank.

People have unfortunately become all too ignorant of the banking system. How can we blame them? The government has setup a system of false security via the Federal Reserve and FDIC. All of the losses and banks runs are temporarily hidden. People think banks are secure mattresses where they put their money.

Nathan Mayer May 26, 2009 at 10:34 am

Frank Shostak gives the best illustration of the destructive nature of FRB:


Steve Horwitz May 26, 2009 at 10:39 am


There’s a difference between a “consensus” and “unanimity.” I didn’t use the word “consensus” but I’m happy to stand by that term as the Hulsmann article certainly shows there’s not unanimity.

newson May 26, 2009 at 10:52 am

to professor horwitz:
yes, i think the only point of absolute unanimity is that central banking amplifies the business cycle.

it would be good to have a free-banker refute the central contention of the hulsmann paper, ie that inflation in itself is not going to generate the necessary cluster of errors and that a pure specie monetary regime (subject to varying mine production) is not going to be afflicted by the classic abc.

Stephan Kinsella May 26, 2009 at 11:00 am


In Guido Huelsmann’s paper Toward a General Theory of Error Cycles, he argues that business cycle theory is concerned with recurring (“cycles”) clusters of errors. That is, not one-time events; and not narrow errors occurring just in one sector.

Now it’s fairly easy to see how a fractional reserve system in which there is a central bank that is the lender of last resort could cause such error cycles, as the errors are introduced from a central point, so to speak. And because money pervades the economy, it is easy to see why the central bank’s manipulation of interest rates causes systemic error, as opposed to isolated, narrow, or sector-wide error only.

Now in your paper you assume that what gives rise to the boom-bust cycle is fractional reserve banking itself. In other words, even without a central bank, with a completely free market, decentralized freebanking system of independent fractional reserve banks, the boom-bust cycle would still be set in motion. I believe this issue is addressed by some of the “fiduciary media” and freebanking articles of Hoppe and Huelsmann previously, but I am curious as to what your view is as to why the errors caused by such decentralized, private FRBs are both systematic (economy-wide) and recurring (cycles), even without the Fed there to play a centralizing role?

Greenbean950 May 26, 2009 at 11:16 am

I’m not sure why FRB would need to be outlawed as a choice of business form. Other banks might establish the more conservative form noted on earlier posts that would charge for checks and have fees for holding the money. The diversity of options from more to less risky banking would fill market needs. I think it would be critical to remove the inflationary central banking system or the money in the non-interest paying accounts would quickly lose their value, but FRB should not be outlawed in a free society.

I feel the same way about certain loan types (balloon specifically). I don’t see why any type of loan arrangement is a problem as long as both sides enter into the contract freely. I am in the military and we move regularly. The balloon loan fits nicely into the military pattern of moving a soldier every 2-3 years. But, many people that I have talked to blame the balloon loan on greedy bankers and credit it as a large reason for the housing problems.

In either case, as long as everyone is responsible for his own actions and is willing to accept the risks involved with his decisions it should be out of the government’s purview. At the end of the day, I think the problem is government intervention in its many forms (FED, regulations, etc.)

jp May 26, 2009 at 11:20 am

“it would be good to have a free-banker refute the central contention of the hulsmann paper, ie that inflation in itself is not going to generate the necessary cluster of errors and that a pure specie monetary regime (subject to varying mine production) is not going to be afflicted by the classic abc.”

As I’ve said earlier, put a government monopoly in charge of your pure specie monetary regime and you’ll see the ABCT emerge.

Eric May 26, 2009 at 12:28 pm


Can something be fraud if EVERYONE KNOWS what is going on? What if only a few know what is going on? Does that make a difference?

I think this is the idea behind the free banking system. As long as everyone knows the risks and nothing is hidden, then it’s NOT FRAUD.

So, what is FRB? It’s kind of like insurance. If an insurance company doesn’t have enough money on hand to pay off claims, is this fraud? Given the possibility of some disaster, isn’t every insurance company doing the same thing as FRB – namely making a guarantee they can’t always keep?

When you put your money into insurance, you have a claim on your money under certain situations – namely that some event occurs and also that there is enough reserves to pay off your claim. I don’t know that this is stated up front, but it would seem obvious.

If all the claimants to an insurance company come at the same time, won’t they be forced into bankruptcy?

What both have in common is that instead of marked holdings held in a safety deposit box, there is a pool of funds that are used to pay off claimants or depositors. This pool is never enough to pay all claims at the same time.

So, why is FRB fraud and insurance underwriting not?

Anyway, this is the best argument against fraud that I’ve heard.

Anonymous May 26, 2009 at 1:06 pm

Eric: “Can something be fraud if EVERYONE KNOWS what is going on? … As long as everyone knows the risks and nothing is hidden, then it’s NOT FRAUD.”

This kind of contract is impossible. Even if a depositor knows that the bank will engage in FRB, this doesn’t detract from the purpose of the contract for the depositor. His purpose is still to deposit the money for safekeeping and to maintain full availability. It’s impossible for both parties to simultaneously contract to retain full availability of the same property.

See page 19 and 141 of “Money, Bank Credit, and Economic Cycles” by Jesus Huerta De Soto”: http://mises.org/books/desoto.pdf

Econ Guy May 26, 2009 at 1:16 pm


“why is FRB fraud and insurance underwriting not”

The difference is that depositor’s have FULL availability of their property, on demand. The insurance claimant only has a contractual claim on property under certain conditions specified in the contract.

Fractional Reserve Banking is like a ponzi scheme, not insurance.

Current May 26, 2009 at 1:31 pm

There is another discussion of this going on on this site

Before that there have been a set of discussion on the topic. I mention those in the discussion linked previously.

The various reasons that people hold different positions are starting to become clear to me. I think (and hope) they are to other people too.

Current May 26, 2009 at 1:32 pm
Greenbean 950 May 26, 2009 at 1:58 pm

Anonymous & Econ Guy,

As long as the depositor knows that he is getting a rate of return (the interest rate) that is commensurate with the risk (his assessment) then even FRB would be his choice. I don’t understand why that is an issue. If a depositor only wanted a safe place for his savings and was ok with not getting a return on this money then he could place it in the older version of the checking account. A free market could provide both.

Before I forget, thank you Mr. Quiggin for engaging in this discussion. It’s a rare moment when our views (Austrian/Libertarian & mainstream) meet in a frank and polite argument.

Joe Stoutenburg May 26, 2009 at 3:09 pm

Greenbean 950 beat me to the punch. Kudos to Dr. Quiggin for engaging in civil debate. Emphasizing points of agreement, Dr. Quiggin should be warmly welcomed as an ally to the Austrian view if he consistently advances the view encapsulated by this:

I agree with the view that the worst case is banks that are guaranteed but weakly regulated.

Anonymous May 26, 2009 at 3:16 pm

Greenbean 950,

The contract you suggest is a logical contradiction and cannot exist. One cannot contract to simultaneously maintain and relinquish full availability of property. I cannot simultaneously sell and not sell you my bike. Similarly, a depositor cannot simultaneously contract to maintain and relinquish full availability of his property.

My problem with FRB is not economic, but legal/ethical. In a just society, FRB would not exist because FRB entails the creation of property titles out of thin air. Do you believe that creating property titles out of thin air is ethically justifiable? Do you think creating property title out of thin air should be legal?

Good point about Quiggin, he’s been a very good sport.

Larry N. Martin May 26, 2009 at 3:25 pm

Mabye FRB is a Jedi mind-trick: “These are not the dollars you are looking for…”

Joe Stoutenburg May 26, 2009 at 3:52 pm


When you take out a loan to buy a home, what is it that backs the new credit extended to you? Does it consist of prior demand deposits? Or is it the house?

People making arguments such as you stake their position on requiring legitimate saving to only occur by placing currency in a bank. However, if you think on the simple baker allegory often repeated here, real saving does not even require money or banking.

In the case of extending new credit to buy a house, a lien on the house itself is the asset backing the liability now on the bank’s balance sheet. If the house is of sufficient value, this is not a case of fractional reserve banking. The bank is fully reserved. It is not reserved with a single commodity as you and other anti-FRB people seem to require. It is backed by multiple assets.

The only problem is to assure that its obligations in common currency can be honored. If it is careful in drafting its contracts, it may be able to honor even excessive withdrawal requests by selling the loans (backed by actual assets) on its books. There is no fraud here.

Of course, it may occur that whether through fraud or error, a bank happens to become fractionally reserved. In the case of extending new credit on durable assets such as homes, I can see how self-feeding bubbles can form as the new credit is used to purchase other durable assets – so driving up those prices. Yet I think that even this process could be managed if a free market is allowed to exist in both those assets and in banking. In practice though, the solution may be to limit reserves to commodities or short-term self-liquidating debts (see Fekete). Market practice would dictate the most stable practices but probably not without bumps.

Problems arise when markets are disrupted or intervention in banking props up unsound practices. I believe that Austrians are right to point at banking as a prime culprit for business cycles. I don’t hold entirely though with impugning “FRB” per se.

Eric May 26, 2009 at 3:52 pm


IF (and that’s a big if) everyone knows what’s going on, then by hypothesis, the contract that you refer to would not be valid if it said something that contradicts it.

However, if someone agrees to a contract knowing full well that part of it is going to be ignored, then what can be said about the party that agreed in this case. Again, my hypothesis is that everyone KNOWS what the banks are doing and doesn’t really care.

But this situation is common, after all, the constitution is a contract whose words are generally ignored. Contracts are always interpreted.

And it’s true, the banksters do try to keep this secret – this is why Ron Paul is proposing a bill to open up the FED for an audit.

My problem isn’t so much with the fraud angle as the force that keeps it operating at such a high level (10:1).

It’s the legal tender laws that are the real problem. With Hayek and Ron Paul’s notion of competing currencies, I think FRB would be constrained (as Murphy points out here) and eventually might even disappear. Only government monopoly power keeps it going.

Eric May 26, 2009 at 5:29 pm

Regarding Fraud and checking account contracts…..

Here’s a statement from my checking account contract with BOFA,

“We may require reasonable advance notice for large cash withdrawals. We may also refuse to honor a request to withdraw funds in cash from your account or to cash a check (including a cashier’s check or other official item) at a banking center if we believe that the amount is unreasonably large or that honoring the request would cause us an undue hardship or security risk. “

The key words are, “

undue hardship

This could be interpreted as: “If we think we don’t have the funds right now, because we engage in FRB, then that would cause us an undue hardship”

Thus, I DON’T have the right to my funds on demand under all conditions.

As always, it comes down to legal interpretation. Without all the possible kinds of hardships listed, it takes a judge to decide. After all, even the constitution is vague in wordings like the common welfare, and look at how that has been interpreted. So, contract law is still nothing more than words interpreted by men with guns. And it’s the force that matters in the end.

DS May 26, 2009 at 6:05 pm

“I think it would be fair to say that Austrians agree that INFLATION is the root cause of business cycles and that we agree that government central banks are the source of inflation. However, there are plenty of Austrians (and I submit a majority of them, if one is talking about PhDs in economics who do work from an Austrian perspective) who are perfectly find with fractional reserve banking and do not see it alone as a cause of inflation and cycles.”

The business CYCLE is not caused by inflation, it is caused by MALINVESTMENT, which is caused by inflation in the money supply through fractional reserve banking. Inflation without malinvestment would still be bad, but it would not cause the economy to boom and then bust, it would simply cause the value of the currency to decrease.

Malinvestment is the key concept in the Austrian business cycle theory – a cycle is created by something going up and then going down. FRB creates money as a consequence of creating debt. The eventual defaulting of portions of that debt and liqudiation of the malinvestment creates the down part of the cycle. Fiat money creation by simply printing currency with no increase in debt does not create a cycle, it creates a direct decrease in the value of money. FRB is what creates the boom and the bust cycle.

FRB creates the cycle because it creates malinvestment driving the “up” part of the cycle and liquidation of malinvestments causes the “down” part of the cycle. Pure money printing (that does NOT arise as a consequence of fractional reserve banking) is certainly a bad thing especially if the amount of money is continually increased. But it does not create a cycle – there is no downward force to cause a cycle. There is no mechanism for destroying the money once it is created, so there is no bust following the boom, because there is no “boom” in the first place. FRB creates the symetrical situation where the money created by FRB can be destroyed in bad debts, bank runs and liquidation, hence causing a CYCLE.

Malinvestment is the key concept. Inflation, if carried out through fractional reserve banking, causes malinvestment, which causes the business cycle. Inflation by itself is not sufficient to cause a business cycle.

That is the Austrian Business Cycle Theory. There may be disagreements between different people who call themselves “Austrians” and some of them may think that business cycles are not caused in this way. But they are operating under a different theory, I’m not sure what you would call that.

Steve Horwitz May 26, 2009 at 6:25 pm

I’m sorry DS but discussing malinvestment for several paragraphs without ever mentioning the structure of production and capital only demonstrates that you don’t fully grasp the concept of malinvestment and its role in the Austrian BCT.

From the very start, the point has been that the artificially low rate of interest caused by the excess supply of money (i.e., inflation) makes production processes with more stages look more profitable, hence resources flow to the earlier stages of production. That lower interest rate is a false signal, thus the increased investment in those earlier stages is MAL-investment, as later revealed by the eventual rise in the interest rate necessitated by the real shortage of savings to finance the longer processes of production. The problem is that capital goods (and human capital) has been allocated erroneously and cannot be costlessly refit/retrained, imposing genuine losses and wasted resources on entrepreneurs. Consumers didn’t want to wait longer for output, but producers thought they did, thanks to the distorted interest rate. This is the ABCT from Mises and Hayek onward. I don’t know where you got your understanding of malinvestment and ups and downs, but it doesn’t appear to be from them.

This is ABCT 101. Malinvestment is one of the key *manifestations* of the ABCT but it is not the *cause* of the cycle. It’s an effect of the ultimate cause, which is the erroneous interest rate signal generated by the excess supply of money (inflation).

Check out the Garrison powerpoints mentioned earlier in this thread.

Anonymous May 26, 2009 at 6:49 pm

Joe Stoutenburg: “In the case of extending new credit to buy a house, a lien on the house itself is the asset backing the liability now on the bank’s balance sheet. If the house is of sufficient value, this is not a case of fractional reserve banking. The bank is fully reserved.”

IOUs and houses are not reserves. The time structure of IOUs and houses is longer than the time structure of demand deposits (which are due instantaneously). Simply put, IOUs and houses cannot be used for redemption. If IOUs and houses are reserves, then why are there reserve requirements to begin with?

Furthermore, would you argue that accounts receivables, PP&E, and other balance sheet line items on the asset side are reserves too?

newson May 26, 2009 at 7:06 pm

to joe stoutenburg:
from memory, fekete is just proposing adam smith’s real bills doctrine. note that business cycles preceded central banking, though of smaller amplitude and localized, not systemic. this is the harm minimization argument of the free-bankers; that competitive redemptions and fear of runs serves to limit the expansion of fiduciary media in a self-regulating manner.

DS May 26, 2009 at 8:49 pm

“This is ABCT 101. Malinvestment is one of the key *manifestations* of the ABCT but it is not the *cause* of the cycle. It’s an effect of the ultimate cause, which is the erroneous interest rate signal generated by the excess supply of money (inflation).”

The interest rate is driven down due to false signals sent by the creation of capital that was not saved into existence but was created by the fractional reserve process. The eroneous signal is not caused by the interest rate, the false signal is caused by the creation of money that is indistiguishable from genuine capital. This false capital is the product of the fractional reserve process and is the mechanism that leads to lower interest rates. The FRB created capital is indistinguishable from capital brought about by deferred consumption, giving the appearance of an excess of savings – supply of capital – which drives down the price of capital – the interest rate. You have the process backwards.

It matters very much how the money is created. No money creation is good, but only FRB money creation has the ability to create pro-cyclical malinvestment and the business cycle as we know it. That’s because FRB creates false capital (capital not saved into existance by deferred consumption) that leads to malinvestment. The effect of the interest rate lowering then increases the demand for capital further which feeds on itself and leads to more borrowing and more money creation, until the capital structure can no longer justify the extra stages of production and must be liquidated.

The cycle is created because the FRB process is pro-cyclical. In the absense of FRB the borrowing of capital by one person would reduce its supply to everyone else and drive up the interest rate. This should reduce borrowing and bring the economy into equilibrium. But fractional reserve created money does just the opposite: more capital borrowed leads to more borrowing – an unsustainable and unstable situation.

In a theoretical environment where FRB doesn’t exist, money printed by other means and distributed to the economy uniformly (an admitedly unlikely situation, but this is an idealization to prove a point) a portion would serve as capital and would not need to be borrowed – thus the demand for borrowed funds would not increase and the interest rate would remain the same – so no malinvestment. All goods and services would increase in price. Not a good or desirable situation, but not destabilizing either, unless more and more money was continuously printed or if it was unevenly distributed. The point being that the mear act of money printing does not cause malinvestment, the uneven-ness in distribution does.

Uneven distribution of created money is an inherent feature in the fractional reserve process, and the basis for malinvestment leading to the business cycle. I will freely admit that there are other ways besides FRB to create uneven money creation – which is why it is always bad – but FRB is certainly the most prominant throughout history.

Real capital can only be created one way: deferred consumption.

(I am not arguing in any way, shape or form in favor of non-FRB money printing, BTW, just showing that money creation in and of itself is not sufficient to cause the business cycle all by itself).

Steve Horwitz May 26, 2009 at 9:41 pm

DS writes:

“The interest rate is driven down due to false signals sent by the creation of capital that was not saved into existence but was created by the fractional reserve process.”

No, it isn’t necessarily FRB that’s the problem. See below.

“The eroneous signal is not caused by the interest rate, the false signal is caused by the creation of money that is indistiguishable from genuine capital.”

Of course. I didn’t say anything different from that. The erroneous signal isn’t CAUSED by the interest rate, it IS the interest rate, which is sending a bad signal because the inflation makes it appear as though savings has taken place when in fact it hasn’t. You and I have no disagreement here.

“This false capital is the product of the fractional reserve process and is the mechanism that leads to lower interest rates. The FRB created capital is indistinguishable from capital brought about by deferred consumption, giving the appearance of an excess of savings – supply of capital – which drives down the price of capital – the interest rate. You have the process backwards.”

No, I don’t think I do. I’m pretty sure I know ABCT pretty well, as a couple of books and all kinds of articles on it might attest to.

The problem here is that YOU are assuming that FRB is the problem when the problem is NOT inherent in FRB but rather a product of a supply of money greater than the public wishes to hold at the current price level. As long as the public is willing to hold bank liabilities, it is supplying the requisite saving to the banking system and the multiple loans the bank creates are not inflationary.

My holding of bank liabilities is “deferred consumption” which thereby supplies real savings to the banking system, yes, even under FRB. This is the argument of Selgin’s book and it is developed in more depth in my own 2000 book.

FRB is not the problem, inflation is. It is the excess supply of money that forces the market rate below the natural rate, which is the result of the forced savings created by the inflation. That forced savings makes it LOOK LIKE there’s more savings when in fact there is not. Consumption has not been deferred, even though the interest rate makes it seem that way. The lower interest rate is a false signal about people’s real consumption/savings tradeoffs and thus generates the malinvestment in the stages of production farther away from consumption that characterize the cycle.

FRB does not inherently cause inflation, therefore is does not inherently cause distorted interest rates, therefore it does not inherently cause malinvestment and the Austrian cycle. It CAN do all of this when it’s combined with central banking or bad regulations, but it need not.

In the environment of free banking with fractional reserves, increases in the public’s willingness to hold money balances supplies real savings to the banking system which gets translated into investment in a sustainable capital structure. When central banks intervene, they over-produce money without a real demand to hold by the public, which results in the cycle.

FRB isn’t the issue. The absence of markets is.

Econ Guy May 26, 2009 at 10:45 pm

Steve Horwitz,

Do you think that FRB is free of legal/ethical defects?

ABOM May 26, 2009 at 11:32 pm

And a simple “yes” or “no” please Steve. No weak-kneed fudging.

newson May 27, 2009 at 12:52 am

a fractional reserve bank in a competitive trading environment grows its profits principally by expanding its loan book. frb banks grow their loan books (inflate) until something breaks. an frb can never know a priori the optimum level to stop expansion, because a bank-run is unpredictable. so the error cycle is inevitable. free-bankers can no more predict the timing of a bank run than anybody else. if it were foreseeable, entrepreneurs would price it into their plans, and bankers would head it off. it’s the unpredictable inflation that frb generates that is behind the cluster of errors, not just inflation per se.

ABOM May 27, 2009 at 2:08 am

err….Steve? Anyone home?

The “y” key is on the top row (around the middle). The “e” key is also on the top row (to the left). The “s” key is in the middle row (near the “e” key).

Conza88 May 27, 2009 at 4:48 am
Steve Horwitz May 27, 2009 at 7:23 am

Sorry, us folks in the eastern US have to sleep.

I have been asked: “Do you think that FRB is free of legal/ethical defects?”

YES, it has no legal or ethical defects. Again, please see the long discussion in this thread: http://blog.mises.org/archives/009973.asp. George and Larry make the case.

No fudging, no hedging, no hesitation. FRB is neither legally nor ethically problematic. Period. End of sentence.

And for Newson: free bankers don’t have to predict a bank run. All they need to do is watching their flows of reserves/clearings, having learned from experience what level of reserves keeps them safe, to see whether their reserves fall below that level. At that point, they know they have overissued relative to demand. This is called entrepreneurship, no different from the judgment exercised by all kinds of businesspeople in all kinds of businesses.

“Growing their loan books” is NOT in and of itself inflationary. Growing their loans (investment funds) beyond the public’s demand to hold their liabilities (savings) is what is inflationary.

newson May 28, 2009 at 7:38 am

to professor horwitz:
i think the issue as to whether frb is a fraud perpetrated by banks on its own customers has indeed been well addressed on the other blog. people will have different opinions…
but i don’t see that the rothbardian challenge has been refuted, ie. that it is the non-banking public that is the primary victim (to the extent that all frb customers are aware of the nature of the contractual relationship to their bank, which has been argued over in the blog). early recipients of frb money enjoy higher purchasing money with respect to late recipients. the same applies to a pure specie monetary order following a gold discovery. but unlike the gold discovery, which gives rise to ancillary social benefits like cheaper jewelry, fillings, and electronic contacts, the increase in inked paper delivers no benefit to the wider community. in this sense, i see the frb system as robbing peter to pay paul, whereas a specie money actually creates net value, even if its quantity changes.

to the extent that banks mirror each other and grow their loan books at a similar pace, the cycle will be bigger that it otherwise would be, and the past data will be of no use in determining adequate reserves.

regarding inflation, i’m taking it to mean the increase in the supply of money, not whether this has any effect on prices. (as you say, increased desire to hold money can offset to a certain extent the increased supply). money supply is at least more tractable than money demand (about which nothing can be said, except it may be between 0 and 100%). anyway, in modern history supply has increased so dramatically it’s arguably the dominant factor, except for brief interludes (like now).

ABOM May 28, 2009 at 8:56 am

Gutsy call, Steve. Gutsy call.

The Ancient Romans didn’t agree, consistently outlawing the practice as an immoral violation of property rights.

But then again, what would they know. The barbarians.

Mike May 29, 2009 at 12:22 pm

What else are we supposed to take the Ancient Romans as the ultimate authority on? Good grief what a bad argument.

ABOM May 30, 2009 at 11:00 pm

(1) If FRB has no “legal or ethical” defects, why did a major civilization criminalize the practice and jail (or kill) its practitioners?

(2) The Roman Empire lasted a few years longer than the current crumbling American “Paper House of Cards” Empire.

At least the Romans slyly swapped silver for debased copper, which gave them a few more years before the monetary system finally imploded.

The US went from gold straight to worthless paper on August 15, 1971, signaling a kind of accelerated mass monetary suicide.

Sorry to be so brutally explicit, but it looks like you needed some help following the logic.

Picking up subtle implications from simple statements is evidently not a strength of yours.

Steven Horwitz May 31, 2009 at 3:20 pm


Maybe the Romans were simply wrong about FRB! Your “logic” amounts to begging the question.

By analogy, you must think charging interest has legal and ethical defects:

“If charging interest has no legal or ethical defects, why did a major civilization criminalize the practice for centuries?”

Identifying logical fallacies is evidently not a strength of yours.

ABOM May 31, 2009 at 6:15 pm

Forgive me, Steve, but I’d bet on the wisdom and morality of the Romans ahead of the average American academic or government representative.

Call me strange.

ABOM May 31, 2009 at 6:26 pm

I think we can resolve this issue once and for all by agreeing with the following objective proposition:

The practice of Fractional Reserve Banking has had a contentious history and although some consider the practice free of negative ethical or legal defects, others strongly disagree, arguing that it is both immoral and destructive of the economic and social order.

Some civilizations have outlawed the practice in the past and even executed its pracititioners, considering the practice a violation of property rights (akin to embezzlement).

Modern societies do not currently consider bankers worthy of summary execution, and no modern economy currently outlaws the practice.

fundamentalist June 1, 2009 at 8:14 am

ABOM, Can you provide any references for the practicie of banning fractional banking by the Romans? I think that is very interesting because the earliest I had seen it reported before was in Venice at its peak. If the Romans recognized it and banned it, that’s important to know.

newson June 2, 2009 at 4:05 am

to fundamentalist:
the first chapter of huerta de soto’s “money, bank credit and economic cycles” deals with the romans, and their treatment of the irregular deposit contract. (horrible stuff for dyed-in-the-wool free-bankers, great insights for others)

ABOM June 2, 2009 at 5:38 am
fundamentalist June 2, 2009 at 7:47 am

Thanks guys. You know, I read de Soto’s book and just forgot about that first chapter.

newson June 3, 2009 at 3:04 am

for me, the first three chapters were the essential ones, the remainder of the book treading familiar ground.

newson June 3, 2009 at 3:25 am

i also liked another hulsmann critique of frb (on top of abom’s tip) -

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