Free Banking: Theory, History and a Laissez-Faire Model (Larry J. Sechrest)

Free Banking: Theory, History and a Laissez-Faire Model (Larry J. Sechrest)
- Highlight Loc. 713-20  | Added on Tuesday, October 25, 2011, 05:18 PM

A third distinctive feature of free banking deals with the relationship between a competitively issued money supply and the market for loanable funds. Specifically, the question is whether or not the preservation of monetary equilibrium, by means of changes in the supply of loanable funds, is consistent with voluntary savings. Selgin argues that it is, since the “aggregate demand to hold balances of inside money is a reflection of the public’s willingness to supply loanable funds through the banks whose liabilities are held. To hold inside money is to engage in voluntary saving” (1988a, 54). This is true because to hold the liabilities of free banks is to choose to refrain from purchasing goods and services. In effect, as long as the supply of inside money keeps pace with changes in the demand for inside money, free banks loan out only that which has been willingly saved. They are “simply intermediaries of loanable funds” (Selgin 1988a, 55).