Building a better banking system, by Alasdair Macleod

Is eliminating limited liability for banks and other dealers of credit the key to a better banking system? From Alasdair Macleod at

This article anticipates the rapidly approaching time when we might be engulfed in a combined currency, asset, and banking crisis. It is becoming clear that such an event can no longer be ruled out.

Economists of the Austrian school have argued that sound money would have prevented a crisis of this sort, and without it the crisis becomes inevitable. The argument for sound money, in other words, a credible gold coin exchange system for banknotes, has already been made. But the question remains over how bank credit, whose fluctuations for a long time have been behind the boom and bust of the business cycle, should be addressed.

Some Austrians argue in favour of a dual banking system, split into separate functions of custodians of deposits and arrangers of finance. They say this arrangement would banish bank credit expansion and the destructive business cycle with it.

But credit creation is not restricted to banks and is common in all economic activities. Banning banks from dealing in credit cuts across established law over credit which has evolved since Roman times. By doing so, banks of deposit would probably fail as a permanent solution and could turn out to be impractical as well.

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