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Journal of Business Ethics (2011) 98:505511 Springer 2010 DOI 10.1007/s10551-010-0590-2
The Case Against Fiduciary Media: Ethics is the Key
Walter Block Laura Davidson
ABSTRACT. Salerno (http://mises.org/daily/4389
Web End =http://mises.org/daily/4389 , 2010a) asserts that in the debate between those who favor and oppose fractional reserve banking, the important issue is not whether or not this institution is inherently fraudulent, but, rather, does it or does it not cause the business cycle. We join this author in thinking both important; however, we reverse this order.
KEY WORDS: fractional reserve banking, fraud, business cycle, contract, ethics
Introduction
In a recent article, Joseph Salerno (2010a) has rightly criticized the position of free bankers such as Lawrence White and George Selgin with respect to their stance on fractional reserve banking (FRB). However, in his article, Salerno states the fundamental theoretical challenge in the debate is not the ethicallegal issue of FRB as fraud, but rather the deep and serious issue of whether, and in what circumstances, FRB is responsible for the business cycle. However, is this really the most fundamental challenge? While we agree with Salerno that the issuance of duciary media by commercial banks does indeed result in business cycles, we argue this is not the most important issue to settle; that in fact the ethical issue is fundamental and thus more important.
In our article, we begin by briey reviewing the current debate between the free bankers and the advocates of 100% banking over fractional reserves. We then turn to the issue of why ethics is fundamental. We demonstrate the circumstances under which a person who has a strongly held ethical belief is forced to reject an economic-utilitarian argument, and show how this applies in the case of the free bankers.
The current debate
According to Salerno (2010a):
Several recent blog posts indicate that the modern supporters of free banking continue to misconstrue the fundamental theoretical challenge posed by their critics. The main question is not about the ethical-legal issue of whether or not fractional-reserve banking is fraud under all circumstances. Nor, ultimately, is it even about fractional-reserve banking versus 100-percent reserve banking. It is about whether the creation of duciary media, fraudulent or not, produces the sequence of phenomena we recognize as the business cycle.
At the...