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DOLLAR: New Book on the Business Cycle and a Free Market in Money and Banking

Dr. Brian P. Simpson, author of Markets Don’t Fail! (Lexington Books, 2005) and an economist at National University in San Diego, CA, has written a new book on the business cycle and a free monetary and banking system.  The book shows how government interference—particularly in the monetary and banking system—causes the business cycle, including the recessions, depressions, and financial crises that are a part of it.  The book also shows how establishing a free market in money and banking can virtually eliminate the business cycle.

This book is a major contribution to the monetary, banking, and business cycle literature.  It builds on the business cycle theory developed by Ludwig von Mises and Friedrich Hayek.  The two-volume book is published by Palgrave Macmillan and is titled Money, Banking, and the Business Cycle, with subtitles of Integrating Theory and Practice for volume one and Remedies and Alternative Theories for volume two.  Volume one was published in April.  Volume two is due out in July.

Part one of volume one shows how manipulations of the supply of money and credit by the government are the primary cause of the cycle.  Part two applies the theory to over 100 years of U.S. history to illustrate the explanatory power of the theory.  The author uses extensive quantities of data to make his case, including data for interest rates, the rate of profit in the economy, the money supply, the velocity of money, industrial production, GDP/GNP, gross national revenue (a more comprehensive measure of spending and output than GDP/GNP), and more.  He shows how the theory explains the Great Depression, the Great Recession, the recession of the early 1980s, and all episodes of the cycle in the U.S. since 1900.  In addition, he goes back to 18th century France and the Mississippi Bubble to demonstrate the explanatory power of the theory.

Part one of volume two critiques alternative theories of the cycle, including Keynes’s theories of depressions and fluctuations, Keynesian “sticky” price and wage theory, and real business cycle theory.  Part two shows what a free market in money and banking would look like, provides an outline to transition to a free market in money and banking, and gives a detailed explanation of why it would lead to greater stability in the monetary and banking system and raise the rate of economic progress in the economy.

Here are links to the two volumes:

Volume 1: http://us.macmillan.com/moneybankingandthebusinesscycle/BrianPSimpson
Volume 2: http://us.macmillan.com/moneybankingandthebusinesscycle-1/BrianPSimpson

It is also available at Amazon at a discounted price.

Money, Banking, and the Business Cycle: Volume I: Integrating Theory and Practice: 1
Money, Banking, and the Business Cycle: Volume II: Remedies and Alternative Theories

The book is highly recommended for anyone interested in free-market ideas or monetary, banking, and business cycle theory.  Economics professors will find both volumes excellent for courses on “macroeconomics,” money and banking, Austrian economics, or the business cycle.  Both volumes would also be great additions to the collections of university libraries and libraries of free-market institutions.

  • Kel Thuz

    Isn’t Brian Simpson a proponent of a strict 100% reserve banking, which basically is contrary to free market in money and banking?

    • Brian Simpson

      You are correct that I am a proponent of 100-percent reserve banking. You are incorrect that such a system is inconsistent with a free market. A free market in money and banking will lead to banks holding 100-percent reserves (backing checking deposits). See chapters 4 and 5 in volume 2 of my book for why. For privately owned banks, 100-percent reserves will not be required by law.

      • Kel Thuz

        Thanks for reply. I have Reisman’s Capitalism: A Treatise on Economics, which I guess is the ultimate economic treatise of the last 50 years and I understand you follow in Reisman’s footsteps. I have changed my position on fractional reserve banking after the notorious discussion which took place on Yaron Brook’s and Don Watkins’ Laissez Faire Blog, when after performing a thorough thought experiment, I came to conclusion that fractional reserve free banking, in a free market, does not violate any rights, given the banks are honest and their customers are provided with the disclaimers and clauses in the contracts that money is going to be lent from their checking accounts.
        After that I spent more time at analyzing banking business as a whole, also read Selgin and White’s book about free banking, and concluded that not only fractional reserve free banking is not morally wrong, it is also economically feasible and does not lead to either inflation or business cycles. Credit liabilities are a marketable good which banks choose to pay cash for. It is a way to convert the future increase in productivity promised by the debtor (so he can pay back the loan) into present goods, backed with depositors money, who are awarded with interest as an incentive to not withdraw their cash. Banking is an enterprise, as any other, more or less risky, but requiring innovation, competetiveness and dynamic attitude towards customer satisfaction. Customers choose to use fractional reserve banks because they want to be paid interest for their checking accounts, keeping the convenience of withdrawal on demand (with some degree of risk), checks, bank transfers and other banking services supplied for checking account holders. Banks have to issue good loans to good debtors, namely such entrepreneurs and individuals who will produce value in the future. Banks who give loans to bad debtors will have to go under, or increase the reserve ratio (which decreases their profit opportunities and customer base), or eventually be bought off by better competitors.

        Anyway, I am looking forward to reading your book (and the previous one too).

        • Brian Simpson

          You raise some important issues on this subject. I agree that fractional-reserve banking can be engaged in through honest means and therefore does not violate individual rights. However, it is government interference in the banking system (or a lack of protection of rights by the government)—including government deposit insurance, bailouts of banks, the government allowing banks to suspend payment of standard money when banks are contractually obligated to pay standard money on demand, and more—that leads to fractional reserves backing checking deposits. It does so because it creates an incentive for banks to take on excessive risk. In addition, if one has a proper understanding of inflation and the causes of the business cycle, one will see that fractional reserves do create these phenomena. All this is addressed in my book.

          I also address a number of invalid claims made by the fractional-reserve free bankers, including invalid claims regarding the nature of money, the demand for money, whether bank reserve ratios in a free market will vary to counteract changes in the demand for money, the significance of the historic episodes of “free” banking, and more. I address invalid claims of economists who believe 100-percent reserves should be required by law for private banks as well.

          My book clears up a number of confusions regarding free banking and the business cycle, so I hope you will get a chance to read it.