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
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, E52Accepted Paper Series
Date posted: October 1, 2008 ; Last revised: September 11, 2011
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