The Review of Austrian Economics

, Volume 30, Issue 1, pp 83–105 | Cite as

The unresolved problem of gratuitous credit in Austrian banking theory

  • Raymond C. NilesEmail author


Ludwig von Mises called gratuitous credit, the ability banks have to create new credit, the chief problem in a theory of banking. This paper traces how Mises and succeeding generations of Austrian-school economists have grappled with this problem, but have failed to find resolution. The result is that Austrian economists disagree on a variety of issues in banking and business cycle theory, such as whether there is an endogenous business cycle under free banking, or cycles only occur under central banking. Before a resolution can be attempted, current thinking must be clarified. This paper divides Austrian economists into five schools of thought. It points to a possible resolution in the economic development writings of Joseph Schumpeter.


Gratuitous credit Endogenous money Free banking Central banking Austrian business cycle theory 100 % reserves Fractional reserves Precautionary reserves Business cycle 

JEL classification

B25 B26 B53 E14 E32 G01 


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of EconomicsGeorge Mason UniversityFairfaxUSA

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