In an article titled “How To Defang All The Banks Once for all“ author J. N. Tlaga takes on “the dean of the Austrian School of economics” to argue that “Fractional reserve banking per se cannot produce new money out of thin air.” Using a set of examples, his main argument is that, contrary to Mises, fractional reserve banking and full 100% reserve banking are identical in their effects on the money supply. Tlaga seems to believe that Austrians hold to the view that gold is the only component of the money supply. The hint is given in this sentence: “Such banknotes are being used in daily trade as convenient substitutes for gold coins (Ludwig von Mises will correctly call them “fiduciary media”, for they are not money, they only represent money) .” Unfortunately this is a misinterpretation of Mises. Austrians do consider banknotes to be a component of the money supply, which is why expanding them amounts to the creation of money out of thin air.
Fractional Reserves and the Creation of New Money
