Abstract
A prominent philosophical/legal case for requiring 100% bank reserves employs a flawed style of argument. It involves essentialism (criticized by Karl Popper and Joseph Schumpeter), persuasive definitions (identified by Charles L. Stevenson), faulty classification, and the piling up of irrelevant facts and considerations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
I single out Professor Huerta de Soto's arguments for their exceptional clarity and detailed documentation. I admire him and his solid work on other Austrian topics and regret recognizing that on the present topic he has misapplied his impressive scholarship and erudition.
Popper (1982, pp. 17–31), O’Hear (1980, pp. 7–8). Dioguardi (n.d.) gives extended quotations from Popper's works. See also Champion (n.d.). Although the essentialism condemned by Popper and the essentialism practiced or admired admired by Carl Menger and some Austrian economists are both partly derived from Aristotle, I doubt that they are quite the same thing (see Smith 1994).
Shahar (2009) is a blatant and instructive example of essentialism. Shahar broods at length over the meanings of words like “justice”, “right” “entitlement”, and “infringement” or “violation” of a right.
Other writings that develop this so-called credit theory of money are Moini (2001), Hummel (n.d.), Innes (1913, 1914), and Macleod (1889, especially pp. 64–85). (Attention to perhaps unusual terminology will forestall misunderstanding.) Macleod also analyzes credit and bank deposits in voluminous other writings, several scanned and to be found at http://books.google.com.
Having a name for such a style of argument would be convenient. “Alan Reynolds style” occurred to me while I was listening to a lecture by that person. I now realize that other authors might lend their names to that style even better.
Unlike actually stamping out fractional reserves, trying to stamp them out, however unsuccessful and pointless, is possible. Its possibility logically neither entails nor excludes that effort's being obligatory (although “ought” presupposes “can”, “can “ does not entail “ought”). Efforts, futile efforts, to stamp out fractional reserves might conceivably, though counterintuitively, be obligatory.
References
Champion R. (n.d.). “Essentialism and the Organic State”. http://www.the-rathouse.com/popessent.html.
Dioguardi, M. (n.d.). “Notes on Essentialism”. http://www.geocities.com/criticalrationalist/essentialism.htm?220931.
Greenfield, R. L., & Yeager, L. B. (1983). A laissez-faire approach to monetary stability. Journal of Money, Credit, and Banking, 15, 302–315.
Hoppe, H.-H., Hülsmann, with J. G., & Block, W. (1998). Against fiduciary media. Quarterly Journal of Austrian Economics, 1(1), 19–50.
Hayek, F. A. (1952). The sensory order. London: Routledge & Kegan Paul.
Huerta de Soto, J. (1998). A critical note on fractional-reserve free banking. Quarterly Journal of Austrian Economics, 1(4), 25–49.
Huerta de Soto, J. (2006). Money, bank credit, and economic cycles. Trans. from the 1998 Spanish original by Melinda A. Stroup. Auburn, AL: Ludwig von Mises Institute.
Hummel, W. F. (n.d.). The credit theory of money. http://wfhummel.cnchost.com/innes.html.
Innes, M. A. (1913). What is money? Banking Law Journal, May 1913. http://www.ces.org.za/docs/what%20is%20money.htm or http://www.moslereconomics.com/mandatory-readings/what-is-money/
Innes, A. M. (1914). The credit theory of money. Banking Law Journal, 31, 151–168. http://www.ces.org.za/docs/The%20Credit%20Theory%20of%20Money.htm (but access apparently requires logging in with a password.
Kiyotaki, N., & Moore, J. (2001). Evil is the root of all money. Clarendon Lecture 1, 2001. www.princeton.edu/~kiyotaki/papers/Evilistherootofallmoney.pdf.
Kocherlakota, N. R. (1996). Money is memory. Federal Reserve Bank of Minneapolis Staff Report no. 218.
Macleod, H. D. (1889). The theory of credit, vol. I. London: Longmans, Green. http://books.google.com/books?id=pu9AAAAAIAAJ&pg=PR3&dq=Henry+Dunning+Macleod++Theory+of+Credit+1889#v=onepage&q=Henry%20Dunning%20Macleod%20%20Theory%20of%20Credit%201889&f=false.
Moini, M. (2001). Toward a general theory of credit and money. Review of Austrian Economics, 14(4), 267–317.
O’Hear, A. (1980). Karl Popper. London: Routledge.
Popper, K. (1982). Unended quest. Revised edition. LaSalle and London: Open Court.
Rothbard, M. N. (1983). The mystery of banking. New York: Richardson & Snyder.
Schumpeter, J. A. (1954). History of economic analysis. New York: Oxford University Press.
Shahar, D. C. (2009). Justice and climate change: Toward a libertarian analysis. Independent Review, 14, 219–237.
Smith, B. (1994). Aristotelianism, apriorism, essentialism. In P. J. Boettke (Ed.), The Elgar companion to Austrian economics (pp. 33–37). Aldershot, England, and Brookfield, VT: Elgar.
Stevenson, C. L. (1944). Ethics and language. New Haven: Yale University Press.
Waismann, F. (1945). Verifiability. In A. Flew (Ed.), Essays on logic and language, first series. Oxford: Blackwell, 1951, 1963. http://www.ditext.com/waismann/verifiability.html.
Yeager, L. B. (2001). The perils of base money. Review of Austrian Economics, 14(4), 251–266.
Acknowledgments
I thank David Howden and Philipp Bagus for conversations and correspondence that were stimulating for me even though—or especially because—we disagree on key points. I also thank an anonymous referee for suggestions, particularly about the work of Henry Dunning Macleod.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Yeager, L.B. Bank reserves: A dispute over words and classification. Rev Austrian Econ 23, 183–191 (2010). https://doi.org/10.1007/s11138-009-0102-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11138-009-0102-8