Fractional Reserve Banking and Central Banking As Sources of Economic Instability: The Sound Money Alternative


John P. Cochran*


* Emeritus Professor, Economic and Emeritus Dean, School of Business, Metropolitan State University of Denver


Fractional reserve and central banking are often seen as a panacea for the economy%a source of easy credit and new purchasing power to quicken trade. But, as recognized by Mises and Hayek, fractional reserve banking supported by a central bank is the major source of financial and economic instability. Growth generated by money creation is unsustainable and will end in a bust often accompanied by a financial crisis. The 2000 bust and the 2007-09 Great Recession were policy induced boom-busts. Elimination of this source of instability requires monetary reform; a denationalization of money as suggested by Hayek.


fractional reserve banking, central banking, sound money, commodity standard, denationalization of money

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