Fractional Reserve Banking and " Austrian " Business Cycles, Part III

Inthe first of this series of posts, I explained that the mere presence of fractional-reserve banks itself has little bearing on an economy ’s rate of money growth, which mainly depends on the growth rate of its stock of basic (commodity or fiat) money. The one exception to this rule, I said, consists of episodes in which growth in an economy’s money stock, defined broadly to include the public’s holdings of readily-redeemable ban k IOUs as well as its holdings of basic money, is due in whole or in part to a decline in bank reserve ratiosIn asecond post, I pointed out that, while falling bank reserve ratios might in theory be to blame for business booms, a look at some of the more notorious booms shows that they did not in fact coincide with any substantial decline in bank reserve ratios.In this third and final post, I complete my critique of the “Fractional Reserves lead to Austrian Business Cycles” (FR=ABC) thesis, by showing that, when fractional-reserve banking system reserve ratiosdo decline, the decline doesn ’t necessarily result in a malinvestment boom.Causes of Changed Bank Reserve RatiosThat historic booms haven ’t typically been fueled by falling bank reserve ratios, meaning ratios of commercial bank reserves to commercial bank demand deposits and notes, doesn’t mean that those ratiosnever decline. In fact they may decline for several reasons. But when they do change, commercial bank reserve ratios usually change gradually rather than rapidly. In co...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs