Proceedings of the 54th International Academic Virtual Conference, Prague

AUSTRIAN SCHOOL OF ECONOMICS’ SUGGESTION FOR INTRODUCING FREE PRIVATE BANKING SYSTEM IS SO ABSURD THAT IT CAN NEVER BE IMPLEMENTED

NABA KUMAR ADAK

Abstract:

Economists of Austrian School think that a few commodities (ultimately gold and silver) emerged as mediums of exchange out of the barter system. They think if money were commodity-money, only then exchanges will be done smoothly without causing any adverse effect on the economy. The supply of any amount of fiat-money proves to be over-supply of money, as no extra commodity is created corresponding to the creation of the fiat-money. Increase in fiat money reduces the value of the money and the price of commodities rises. They think, that to be able to spend more than its tax-receipts can support, the government will allow the central bank to fraudulently increase fiat-money. Austrian economists also think that the central bank (CB) allows the commercial banks to create credit-money. They think the government and the central bank jointly inflate (increase) the supply of fiat-money. This causes inflationary pressure on the economy and leads the economy to cycles of recessions. So, they prescribe that the government and the CB should be deprived of their monopoly power to create money and that only private banks should be allowed to create money. They think that private bankers will not increase supply of money to that extent that can harm the stability of money and the Consumer Price Index. The Austrian economists suggest how the private bankers will create money and how the people will accept or reject any money to hold. They argue that private banks will manage their own affairs if they were left without any external interference. The purpose of this paper is to show that the alternative processes suggested by the Austrian School of Economists are very much impractical and detrimental to the economy. In their private banking system, different banks will issue notes of different denominations. People will have to be always on alert to see which money becomes more stable than other moneys. Private Banks will also have to remain always on guard lest their money is devalued in competition to other banks’ moneys. There is no guarantee that no private bank will fall. Thus, both private banks and the people will be puzzled in deciding what policy or action will be the best choice for keeping the value of their money stable or which money they should hold so that they do not face any future devaluation or any bank-failure. Therefore, the private banking system will lead to uncertainty and complete chaos in the monetary and financial systems.

Keywords: Fractional reserve free banking, Ma, Mb, Commodity credit, Circulation credit, Fiduciary media, Abolition of Central Bank, Mal-investment, unemployment, concurrent currencies, boom-bust cycle, bunch of commodity reserve standard, ‘a collection of raw material prices’ standard, sound money, stable money, private banking

DOI: 10.20472/IAC.2020.054.003

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