Paul Krugman, without expecting a very serious answer, questions the Austrian School’s allegedly critical position on fractional reserve banking.
I don’t have much to say, and I don’t think there is much to say. I left a comment that sums it up: these Austrians are increasingly in the minority. The problem is that it certainly doesn’t seem as if this is true. The blogosphere is full of so-called “internet Austrians,” many of which affiliate themselves with Rothbardian banking theory. These tend to be very vocal, and so people basing their opinion on blogosphere reviews are getting distorted statistics. The fact is, there are increasingly few academic Austrians who still adhere to full reserve banking — usually, in some way linked to the Mises Institute, although even there the resistance to the Selgin/White model of (fractional reserve) banking is dissipating (I have in mind economists like Roger Garrison).
I usually avoid confrontation with full reservists on the topic. Those kind of discussions usually don’t go anywhere. But, from the point of view of needing to sell a different view of the broader Austrian tradition, maybe it’s time for Austrian (fractional reserve) free bankers to drown out the minority. All this being said, I don’t kid myself by thinking that Krugman might respect Austrians more if he were privy to alternative positions within the school.
Unrelated to the full reserve v. fractional reserve debate, I’d like to comment on money market funds. Krugman is essentially arguing that the modern financial system wouldn’t exist if we had a full reserve banking system. I don’t disagree, and I don’t see why it’s a problem. It would exist in a very different fashion even with fractional reserve free banking. Money market funds, for instance, were a product of the 1970s, when depositors were looking for alternatives to the tightly regulated demand deposit — remember, interest on demand deposits was (and still is) banned. Banking evolution is historically contingent.