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in Bagus and Howden 2010, 39; bold added.) More generally, the FRFB writers see nothing special about demand deposits, that would make them qualitatively different from other forms of credit instruments.
As we have seen, it is essential for the FRFB position that people adding "inside money" (i.e.
Yet when it comes to arguments over FRFB within the camp of economists who all endorse the Mises-Hayek theory of business cycles, it is crucial to study Mises's own view of fiduciary media and the connection to an unsustainable boom.
Contrary to the FRFB writers, Mises does not think that banknotes are simply a credit instrument with zero maturity.
Yet with FRFB, this sluggish adjustment can be neatly sidestepped: Each individual goes to the bank and takes out a loan, in the form of newly printed banknotes (claims on gold), which he or she then adds to cash balances.
Since our focus here is on the behaviour of central banks, a full discussion of the merits of FRFB relative to full-reserve banking is beyond the scope of the present paper.
Under FRFB private banks would be responsible for maintaining their own solvency and liquidity.
Selgin aims to prove that a FRFB system is stable, stating:
(1988, 54) By assuming that the FRFB system is stabilizing, Selgin proceeds to look at changes in the demand to hold bank liabilities and how the FRFB system would react in a supposedly stabilizing way.
If a FRFB system is not stabilizing but creates business cycles, there will be recessions that entice shifts in the composition of individuals' money holdings--the demand to hold money proper increases while the demand to hold bank liabilities decreases.
We think it is not surprising that some historical examples point to the same results that our theory predicts can occur in a FRFB system.
This is perhaps the most crucial point determining whether a FRFB system a la Selgin is self-destabilizing or not.