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Alasdair Macleod: Is bank credit friend or foe?
By Alasdair Macleod
Thursday, August 4, 2022
Advocates of sound money place much of the blame for inflation on bank credit. Do away with the creation of bank credit, they say, and the destructive cycle of boom and bust will be cured. But is this solution practical, and is it the real inflation problem?
It may be an inconvenient fact, but commodity prices prove to be far more volatile under a fiat currency regime than they ever where under sound money and fluctuations in bank credit.
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Understanding bank credit possesses a new urgency, given that this cycle of its expansion appears to be ending and the fiat world is heading for a periodic credit contraction. This article details how bank credit is created, how it has evolved and its role in fostering economic progress. We look at the alternative of banks of deposit, their history, and their practicality as a replacement for banking as we know it today.
We must be clear that there is a difference between cycles of bank credit, which so long as they are moderate can be tolerated, and state-induced inflation of the currency, which can be expected to lead to a permanent loss of a fiat currency’s purchasing power. In this context, are proposals to do away with bank credit taking a sledgehammer to crack the wrong nut?
On this subject, the Keynesian and Austrian economists disagree fundamentally. The conclusion of this article is that bank credit is economically beneficial, but it is state intervention in one form or another which has made it not just a driving force for economic progress, but unnecessarily destructive as well. ...
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