Free Banking, the Real-Balance Effect, and Walras' Law

Van den Hauwe, Ludwig M. P.

Abstract

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Free Banking, the Real-Balance Effect, and Walras' Law

Ludwig M. P. Van den Hauwe

affiliation not provided to SSRN

September 26, 2008

Procesos De Mercado Revista Europea De Economía Política, Vol. 7 No. 1, pp. 241-258, 2010

Abstract:
The author of this article draws special attention to two particular claims of the free bankers concerning the supposed working characteristics of a fractional-reserve free banking system which may strike the reader as questionable. The first of these relates to the alleged absence of a real-balance effect under free banking. The second relates to the free bankers' reference to Walras' Law as providing a rationale for the free banking system's "offsetting" actions when confronted with changes in the public' s demand to hold bank liabilities. This rationale is defective since it is based on an erroneous interpretation of Walras' Law. The author's conclusion does not imply that it is not at all possible, from a rational viewpoint, to make a plausible case for this variant of free banking, only that the argument should be freed from certain questionable tenets.

Number of Pages in PDF File: 21

Keywords: Walras' Law, Real-Balance Effect, Free Banking

JEL Classification: E0, E32, E42, E5, E51, E52

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Date posted: October 1, 2008 ; Last revised: September 11, 2011

Suggested Citation

Van den Hauwe, Ludwig M. P., Free Banking, the Real-Balance Effect, and Walras' Law (September 26, 2008). Procesos De Mercado Revista Europea De Economía Política, Vol. 7 No. 1, pp. 241-258, 2010. Available at SSRN: http://ssrn.com/abstract=1274385

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Ludwig M. P. Van den Hauwe (Contact Author)

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