scholarly journals Keynes and Fractional Reserve Banking: The NPV vs. MEC

2018 ◽  
pp. 39-74
Author(s):  
Edward W. Fuller
Keyword(s):  
Business Cycle ◽  
Net Present Value ◽  
Jel Classification ◽  
Business Cycle Theory ◽  
Present Value ◽  
Market Theory ◽  
Fractional Reserve Banking ◽  
John Maynard Keynes ◽  
Fractional Reserve ◽  
Reserve Banking

This paper develops a framework for the economic analysis of frac- tional reserve banking. After introducing the loan market theory and the net present value, the paper shows how fractional reserve banking causes the busi- ness cycle by systematically falsifying net present value rankings. Next, the paper demonstrates that Keynes’s IS-LM model and marginal efficiency of cap- ital rule out fractional reserve banking as the cause of the business cycle. Finally, the paper shows that Keynes’s theory is fundamentally flawed because his theory of investment in incorrect. Keywords: Fractional reserve banking, Austrian business cycle theory, John Maynard Keynes, Keynesian economics, net present value, marginal efficiency of capital. JEL Classification: E12, E22, E32, E43, E51, E58, G30. Resumen: Este trabajo desarrolla un marco para el análisis económico de la banca con reserva fraccionaria. Después de presentar la teoría del mercado de préstamos y el valor presente neto, el documento muestra cómo la banca con reserva fraccionaria causa el ciclo económico al falsificar sistemática- mente las clasificaciones del valor presente neto. A continuación, el docu- mento demuestra que el modelo IS-LM de Keynes y la eficiencia marginal del capital descartan la banca con reserva fraccionaria como la causa del ciclo económico. Finalmente, el artículo muestra que la teoría de Keynes es fundamentalmente defectuosa dado que su teoría de la inversión es inco- rrecta. Palabras clave: Banca con reserva fraccionaria, teoría austriaca del ciclo eco- nómico, John M. Keynes, economía keynesiana, valor actual neto, eficiencia marginal del capital. Clasificación JEL: E12, E22, E32, E43, E51, E58, G30.

scholarly journals Intervención coactiva en el mercado: procesos, modalidades y efectos

2021 ◽  
pp. 165-197
Author(s):  
Jorge Bueso Merino
Keyword(s):  
Key Words ◽  
Jel Classification ◽  
Market Process ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
Palabras Clave ◽  
Reserve Banking

Developing Böhm-Bawerk’s (1914) Macht oder ökonomisches Ge-setz, we characterize the different intervention modalities as coercive «fixing» of prices, goods (quantities or modes of performing) or persons, also with their effects. Given that the subjective but real forces underlying market processes respond with effects which are opposite to those pursued, the «intervener» or controller would be induced to an in crescendo «fixing» of more and more as-pects of reality. We also show fractional reserve (banking) as another kind of intervention, since it produces or induces the same effects, including a call to implement monopolistic schemes. Key words: Market Process, Böhm-Bawerk, Intervention, Rothbard, Fractional Reserve JEL Classification: B41, B53, D42, D43, D45, L43, L51, G01 Resumen: En desarrollo del trabajo póstumo de Böhm-Bawerk (1914) Macht oder ökonomisches Gesetz, se caracterizan los diferentes tipos de intervención en tanto que «fijación» coactiva de precios, bienes (cantidades o modos de hacer) o personas, junto con sus efectos correspondientes. Como las fuerzas subjetivas pero reales que mueven los procesos de mercado originan efectos contrarios a los eventualmente deseados, el«interventor» se ve inducido a fijar sucesivamente cada vez más aspectos de la realidad. También se muestra a la reserva fraccionaria como otra modalidad más, que produce e induce los mismos efectos, incluido la llamada a implementar esquemas monopolísticos Palabras clave: Proceso de Mercado, Böhm-Bawerk, Intervención, Rothbard, Reserva Fraccionaria Clasificación JEL: B41, B53, D42, D43, D45, L43, L51, G01

scholarly journals Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory

2020 ◽  
Vol 23 (2) ◽  
pp. 131-151
Author(s):  
Joanna Kruk
Keyword(s):  
Business Cycle ◽  
Net Present Value ◽  
Cash Flows ◽  
Capital Asset Pricing ◽  
Business Cycle Theory ◽  
Present Value ◽  
Austrian Business Cycle Theory ◽  
Austrian Business Cycle ◽  
The Business Cycle ◽  
Corporate Risk

This paper expands Fuller’s (2013) analysis of the net present value and interest rate changes in the context of the Austrian Business Cycle Theory. During the boom phase of the business cycle, the economy shifts to a more risky position as the result of entrepreneurs’ profit targeting. To quantify this risk the duration, defined as the number of periods that elapse before the average present value dollar is received from a stream of cash flows, can be used. The new risk-adjusted net present value is created after applying the duration to capital asset pricing model determining the discount rate that should be used to calculate the present value of the project.

scholarly journals Net Present Value, Duration, and CAPM in Light of Investment Theory: A Comment on Kruk

2021 ◽  
Vol 24 (2) ◽  
pp. 348-359
Author(s):  
Thomas Hering ◽  
Michael Olbrich ◽  
David Rapp
Keyword(s):  
Business Cycle ◽  
Interest Rates ◽  
Net Present Value ◽  
Business Cycle Theory ◽  
Present Value ◽  
Austrian Business Cycle Theory ◽  
Investment Theory ◽  
Austrian Business Cycle ◽  
Finance Theory ◽  
German Investment

In her paper “Corporate Risk Evaluation in the Context of Austrian Business Cycle Theory” recently published in this journal, Joanna Kruk aims to investigate how artificially low interest rates resulting from central bank intervention distort individual investment appraisals and ultimately result in both entrepreneurial misjudgment and resource-wasting malinvestment, fueling the business cycle. She identifies entrepreneurs’ net present value calculations, supposedly unadjusted for risk, as a major issue and suggests adjusting those calculations for risk via both the duration method and the Capital Asset Pricing Model to mitigate the distorting effects. Her argumentation is, however, trapped in neoclassical reasoning and is adversely affected by several misconceptions of the net present value criterion. This comment seeks to reveal those fallacies and explain how to address uncertainty when using net present value calculations to make those calculations part of the solution rather than part of the problem of entrepreneurial misjudgment. The findings are derived from German investment theory rooted in the Austrian school of thought, meaning that they differ compared to those of neoclassical finance theory.

scholarly journals How to create a banking & monetary system for the 21st century: the Huerta de Soto and Chicago plans reworked

2021 ◽  
pp. 13-66
Author(s):  
Alok Basu
Keyword(s):  
Monetary Policy ◽  
Business Cycle ◽  
Economic Activity ◽  
Present System ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Credit Creation ◽  
The Business Cycle ◽  
Reserve Banking

Every economics textbook will tell you that banking is at its core a process of intermediation designed to facilitate the transfer of savings into investment. In some respects fractional reserve banking does this much too well. It is a system which takes deposits and lends them out. The problem is that this process is built on – for want of a better word – deceit. Borrowers are offered secure term contracts, while depositors are promised their money back whenever they want it. This deceit only works because most depositors are happy to keep their money in the banking system most of the time. Supporters of fractional reserve banking would say – so what. The fact that the system exploits this trait of depositors – to keep their money in banks rather than under their mattresses – is surely a good thing. Without such a system, lending would not happen to anywhere near the same degree, credit creation would be severely impeded and economic activity adversely affected. The problem with this system is that it has a tendency to max out on credit creation in the good times, but chronically undersupply credit in the bad times – thus greatly accentuating the natural ups and downs of the business cycle. And over a course of time, it results in an accumulation of debt in society that is not economically very healthy. Recent events underline these concerns. Any proposed reform of the banking and monetary system needs to be able to illustrate that such a system will be capable of delivering the «right amount» of credit in good times and bad – so as not to impede economic activity in downturns, but also not to act as an accelerator for the good times. We can refer to this as the «optimal» quantity of credit over the course of the business cycle. In this paper, I assess two models. One is a derivative of the so-called «Chicago Plan», and set out in the IMF Working Paper by Michael Kumhof and Jaromir Benes titled The Chicago Plan Revisited published in August 2012. The other is an equity-based proposal which I call the «Huerta de Soto Plan», and derived from proposals set out by Professor Jesus Huerta de Soto in his book Money, Bank Credit and Economic Cycles, published as far back as 1998. The Kumhof/Benes proposal puts monetary policy at the heart of the credit creation process in a way that is far more effective than under the current system. Governments end up achieving far greater control of the levers of monetary power than under today’s fractional reserve system. By contrast, the Huerta de Soto Plan opts for a free-market based approach to money resulting in a free and genuinely open market for credit that is driven entirely by the forces of competition and where governments and central banks have no role to play in monetary policy. This paper spells out the mechanics underlying both plans, and assesses their relative merits. Neither plan is perfect. Both propose extremely radical reform of the modern monetary system, and they can result in – I believe – some potentially very inflationary and damaging behavioral effects in the process of the transition from the present system to what is proposed. The Kumhof/Benes proposal is far and away the weaker of the two – not only would it be economically and politically unworkable – the behavioral consequences would be harder to control. By contrast, the Huerta de Soto Plan – although more radical in many respects – would also be more palatable, albeit it would need certain tweaks, and the adverse behavioral impacts arising from the implementation of this plan would be somewhat easier to offset. Key words: Huerta de Soto, Kumhof/Benes, Chicago Plan, Fractional Reser-ve, Mutuals, Quantitative Easing. JEL Classification: B31, B53, E42, E52.

scholarly journals A Digital Currency Architecture for Privacy and Owner-Custodianship

2021 ◽  
Vol 13 (5) ◽  
pp. 130
Author(s):  
Geoffrey Goodell ◽  
Hazem Danny Al-Nakib ◽  
Paolo Tasca
Keyword(s):  
Systemic Risk ◽  
Banking System ◽  
Developed Countries ◽  
Fractional Reserve Banking ◽  
Point Of Sale ◽  
Digital Currency ◽  
Fractional Reserve ◽  
Banking Relationships ◽  
Reserve Banking ◽  
Payment Mechanisms

In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both e-commerce purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology, such as blind signatures or zero-knowledge proofs, to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner-custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.

Rozeff on free banking: a critique

2018 ◽  
Vol 34 (2) ◽  
pp. 123-136
Author(s):  
Laura Davidson ◽  
Walter E. Block
Keyword(s):  
Design Methodology ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Monetary System ◽  
Fractional Reserve ◽  
Reserve Banking

Purpose The purpose of this paper is to correct Rozeff (2010). He contends that fractional-reserve banking is legitimate and efficacious. The authors demonstrate that it is not. Design/methodology/approach The design of this paper is to quote widely from Rozeff (2010) and then to expose his errors of analysis. Findings The authors demonstrate that fractional-reserve banking is neither legitimate nor efficacious. Originality/value Money is the lifeblood of the economy. If so, then banking is the marrow of the economy, since it is from that sector that money arises in the first place. It is crucially important, then, that the monetary system be based on sound principles. Fractional-reserve banking is a violation of these sound principles. Therefore, it is valuable to demonstrate that this is indeed the case.

scholarly journals Unanswered quibbles: George Selgin still gets it wrong with fractional reserve free banking

2021 ◽  
Author(s):  
Philipp Bagus ◽  
David Howden
Keyword(s):  
Banking System ◽  
Real Income ◽  
Jel Classification ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Credit Expansion ◽  
Investment Projects ◽  
Fractional Reserve ◽  
Monetary Equilibrium ◽  
El Sistema

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system —even a free banking one— is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of «MV» by a FRFB system causes. Key words: Free banking, fractional reserve, monetary equilibrium, credit expansion, economic cycle. JEL Classification: B53, E32, E42, E5, G18, H11, K39, P3, P34. Resumen: En este artículo respondemos a George Selgin, que a su vez respondió a nuestro artículo «Fractional Reserve Free Banking: Some Quibbles». Selgin considera que los saldos de tesorería son ahorros, mientras nosotros nos fijamos en los ahorros reales necesarios para mantener proyectos de inversion. Ahorros reales son ingresos reales no consumidos. Variaciones en los ahorros reales no necesariamente coinciden con las variaciones en los saldos de tesoreria. Mostramos que una expansión crediticia coordinada es posible en un sistema bancario de reserva fraccionaria (FRFB) y que las reservas prudenciales no constituyen necesariamente un limite a la expansión co - ordinada. Discutimos varios escenarios en los que el sistema FRFB puede expandir los créditos sin un aumento previo en los ahorros reales. Todas estas facetas muestran que un sistema bancario de reservas fraccionarias —incluso uno de banca libre— es inherentemente inestable y produce incentivos para imponer un banco central estabilizador. Mostramos que el origen de nuestras diferencias con Selgin está en un enfoque diferente a la teoría monetaria. Selgin es partidario de la ecuación de intercambio que es muy agregada y que le impide ver los problemas microeconomicas que la estabilización de «MV» por parte del sistema FRFB produce. Palabras clave: Banca libre, reserva fraccionaria, equilibrio monetario, expansión crediticia, ciclo económico. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34.

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