David Howden

Saint Louis University - Madrid Campus · Business and Economics

Survey evidence regularly shows that bank customers view bankers as less ethical or honest than other professions. This article sheds light on one potential origin of these misgivings that has been until now unaddressed. The legal system endows certain rights to banks without altering the duties obliged of depositors. By categorizing rights accordi...

Kvasnicˇka (2007) attempts to demonstrate that the gold standard may be an unlikely alternative for small economies to revert to. The crux of his argument deals with supply considerations that could prove fatal to a fledgling currency. An influx of gold from the world’s existing gold stock, or its new production could prove to be a destabilising su...

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations...

Does the world really need another book on the Great Depression? Ali Kabiri, lecturer in economics at the University of Buckingham, trudges into disputed territory but holds the reader´s attention by making three new contributions. First, he has collected new data on dividend yields and growth rates for U.S. common stocks during the 1920s to augmen...

What’s wrong with Keynesian economic theory? asks Steven Kates. In this edited volume the Associate professor at Australia’s RMIT University gathers an eclectic mix of economists to outline their misgivings of Keynesian theory. The result is a concise and handy reader that comprehensively overviews the areas where Keynesian economists run afoul.

How politically independent can financial markets be? Not very, at least not if history is any guide with abundant recent examples including the Federal Reserve’s quantitative easing programs, the U.S. Treasury’s various bailouts of financial companies or the European Central Bank’s large-scale asset purchases. This realization forms the first of t...

Barnett and Block (2015) claim that Bagus and Howden (2012b) support indirectly the concept of market failure. In this paper, we show that maturity mismatching in an unhampered market may imply entrepreneurial error but cannot be considered a market failure. We demonstrate why fractional-reserve banking leads to business cycles even if there is no...

What role do demand deposits serve in the financial system? The answer to this simple question has great implications in keeping the legal terms of the contract consistent with the demands of the financial system. Demand deposits are a perfect monetary substitute. Since money is only held to hedge against perceived uncertainty in both the timing an...

In the pages of this journal, a fruitful debate has evolved on the ethical legitimacy of fractional-reserve banking. In this article we respond to the new arguments raised by Evans (forthcoming) as we clarify our (Bagus, Howden and Gabriel 2015) position on the unethical and illegitimate nature of fractional-reserve banking. Fractional-reserve bank...

The “subsistence fund” was once an integral part of Austrian business cycle theory to indicate the resource constraint on the ability to complete investments. Early agrarian and industrial economies were constrained by resource availability in a manner consistent with that alluded to by the subsistence fund. This link became more tenuous as the gro...

Machaj (2015) does a great service in pointing out a key assumption, heretofore unaddressed, in Filleule (2007) and Hülsmann (2010). Machaj errs, however, in stating that who saves will have an ambiguous effect on the interest rate and that where savings are directed can have ambiguous effects on the length of production. In this brief comment I wi...

Followers of Austrian business cycle theory (ABCT) often attribute the fact that John Maynard Keynes seemingly bettered Friedrich Hayek in their debates in the 1930s to a combination of two factors. On the one hand, Keynes was able to give policy recommendations to policy-makers at a time when they were anxious to “do something”, i.e., the midst of...

Ludwig von Mises (1881-1973) baptized the idea that the gain of some is caused by the loss of others as the “Montaigne dogma.” Mises considered the fallacy to be very widespread and sufficiently noteworthy that he devoted chapter 24 of his magnum opus Human Action to refuting the idea. Casto Martín Montero Kuscevic and Marco Antonio del Río Rivera...

What is the relationship between opportunity cost, choice and action? In my review of Eduard Braun´s Finance Behind the Veil of Money (2014), I took exception with his view that opportunity costs are not only unnecessary, but even detrimental to understand decision making. In this response, I outline that opportunity costs are necessary to understa...

Purpose – The authors begin with an admittedly simplistic statement: “civilization” is best represented by the increased availability of utility providing goods and services. In other words, civilization is synonymous with economic development. The purpose of this paper is to concern three questions. First, how does civilization develop? Second, wh...

Depositors have perceived banks as acting unethically during the most recent recession. One area of consternation is the ambiguity of the legal obligations entailed by the deposit contract when it is backed with only fractional reserves. In this article, we apply an existing analysis of the legitimacy and ethicality of banking practices to a wider...

Most of us are tuned in to some of the broad sweeping demographic challenges facing the world. Sub-replacement birthrates imperiling European economic growth; Latin American immigrants out-reproducing their American counterparts in the United States and altering voting patterns; a graying Japanese workforce compounding the country's public debt pro...

Despite being a mainstay of modern economic theory, the concept of arbitrage is sorely misused. In this paper we overview such instances, and offer an alternative definition. Most applications of arbitrage use it as a general equilibrating tendency irrespective of whether the outcome is certain. Alternatively, it can be used in a rather “loose” man...

A unified definition of what defines a “good” made possible a standard theory that could analyse the principles of supply, demand and price determination, regardless of the specific nature of the good in question. In this way, it matters not whether the economist is dealing with a haircut, an automobile, a tool or an insurance policy, the general p...

Balance sheet analysis is a standard practice for assessing private sector businesses. No such analysis has been applied to central banks previously. We provide the theoretical foundation and rationale for such analysis. This foundation is rooted in the quality theory of money which places special emphasis on subjective factors as a complement to t...

In Finance Behind the Veil of Money, Eduard Braun (2014, pp. 30–36) takes the minority view that opportunity costs are not only unnecessary but even unhelpful to understanding choice.Such a view errs by overlooking the difference between the actor’s ex-ante expectations of an action with the ex-post results. More importantly, it mistakes what role...

Followers of Austrian business cycle theory (ABCT) often attribute the fact that John Maynard Keynes seemingly bettered Friedrich Hayek in their debates in the 1930s to a combination of two factors. On the one hand, Keynes was able to give policy recommendations to policy-makers at a time when they were anxious to “do something”, i.e., the midst of...

The treatment of money, and especially banking, should seem more than a little odd to the student of economics. An inordinate amount of attention is afforded to one good – money – while no other good is discussed in any more than a cursory way. All curricula include a class on “Money and Banking”, making banking the only line of business to qualify...

Austerity is perhaps the most prolific and controversial policy to come out of the recent crisis for two reasons. On one hand, it is difficult to define exactly what it means for an economy to be austere. On the other hand, once this definition is established, the complexities of financial issues – owing to the fact that funding constraints exist i...

Must banks match asset and liability maturities, as William Barnett and Walter E. Block (200910. Barnett, William and Walter E. Block. “Time Deposits, Dimensions and Fraud.” Journal of Business Ethics 88, 4 (2009): 711–716.View all references, 201111. Barnett, William and Walter E. Block. “Rejoinder to Bagus and Howden on Borrowing Short and Lendin...

Austrian Business Cycle Theory can shed light on the ways in which the current Chinese economic boom is unsustainable. On the one hand, government interventions, such as land monopolies, have raised costs for real estate developers. By limiting the availability of investment instruments and access to external markets, government interventions have...

China's population growth rate surpassed the world average from 1949 to the late 1970s. Under Mao's leadership, the government promoted pro-natal policies and remunerated families not according to their productivity but by the number of workers. Faced with extreme economic scarcity due to the communist regime's poor economic policies, parents saw l...

Currency is the physical embodiment of money – typically coins and notes. Its value is assigned either through social convention motivating individuals to use it or through legal tender laws obliging them to do so. Although once the primary component of the greater money supply, technological innovations have increasingly diminished the importance...

This review of Eduard Braun's "Finance Behind the Veil of Money" lauds the author for his revival of the subsistence fund as a resource constraint in Austrian Business Cycle Theory. Braun makes use, however, of an archaic definition of costs that compromises his novel approach to interest-rate determination.

Although commonly misconstrued as a statement concerning the “correctness” of prices, the Efficient Market Hypothesis (EMH) is a statement about their informational content. The aftermath of the recent recession has brought renewed skepticism to EMH, even leading some to redefine it as the “inefficient” market hypothesis. We demonstrate that such a...

While ethical implications of direct taxation systems have recently received renewed attention, a more veiled scheme remains unnoticed: inflation. We overview the causes of inflation and assess its consequences. Salient wealth redistributions are a defining feature of inflation, as savers and fixed income individuals see a relative wealth reduction...

This paper uses Iceland and Ireland's recent banking crises to demonstrate that although centralized monetary authorities can create artificially low interest rates via monetary expansion, this method is not the sole method for doing so. The use of these countries is also appealing because their crises offer similar symptoms large buildups of debt...

This paper gives a brief overview of China's family planning policy which, although recently relaxed, still controls a large swath of the population. Unofficially known as the ‘one-child policy’, it resulted from the social strife of the 1970s coupled with a Malthusian pessimism concerning the capability of the still largely closed and isolated Chi...

In a bid to understand how the Federal Deposit Insurance Corporation (FDIC) can aid in promoting financial stability, economists have recently called the definition of core deposits into question. Deposit insurance is extended to core deposits because they represent the stable funding base that the banking system relies on for liquidity. The criter...

While economists have generally quite favorable views of market-oriented solutions to the provisions of goods and services, there is one common exception: money (Rothbard 1991: 2; Huerta de Soto 2012: xxx). This seeming paradox brings with it three unfortunate results. First, since the supply of money is assumed to be produced optimally by a centra...

The essays contained in this volume have portrayed the Federal Reserve in a less than favorable light. In particular, they have pointed to both deficiencies in the theory guiding the Fed's operations and the venerated institution's historical record. © 2014 Springer International Publishing Switzerland. All rights reserved.

One hundred years after its foundation, the Federal Reserve has been entrusted with an enormous expansion in its operating powers for the sake of reviving a sluggish economy during the financial crisis. The aim of the present volume is to present a thorough and fundamental analysis of the Fed in the recent past, as well as over the entire course of...

Much insider trading literature focuses on the redistribution of monetary rents. This focus has led to ambiguous and conflicting results, unable to identify who the clear winners and losers of insider trading legislation are. Lacking any clearly defined beneficiary, an analysis of the origins and continued support of such legislation is lacking. Th...

The financial crisis has led to new interest in the ethics of financial markets. In this article, we further the debate on the nature of banking contracts by showing that the fundamental subjective purposes of loan and deposit contracts are irreconcilable. Any resultant mixture of the two contracts is a legal aberration. We consider a mutual fund a...

This article analyzes the possibility and consequences of central bank insolvency. Sovereign insolvency may indirectly cause or aggravate problems leading to central bank insolvency. Sovereigns have a bailout guarantee, either implicitly via loans from major central banks or the IMF, or explicitly, as is the case in the Eurozone via the European St...

When the stories of the Icelandic and Irish crises are told, they are framed as if one country did everything right to exit recession and the other country everything wrong. This article assesses their recovery policies and finds that the truth lies somewhere in between. By allowing its banking system to suffer substantial losses, Iceland shielded...

How ethical have recent banking practices been? We answer this question via an economic analysis. We assess the two dominant practices of the modern banking system – fractional reserves and maturity transformation – by gauging the respective rights of the relevant parties. By distinguishing the legal and economic differences between deposit and loa...

The relationship between banking deposits and loans is contentious. While the defense of a 100 percent reserve clause to eliminate fractional reserves has commonly been asserted on economic and ethical grounds, Huerta de Soto (2006) arguments are largely ignored. Rozeff (2010) is an example. We show that treating a loan and a deposit interchangeabl...

This ambitious book has a three-fold purpose. First, it seeks to clarify “entrepreneurship” in a manner amenable to both modern management and economics literature. Second, it redefines the theory of the firm in order to integrate the role of the entrepreneur more fully and give a comprehensive view on why firms exist. Finally, and most successfull...

Iceland became the first developed country in 30 years to request help from the IMF in 2009. While the depths of its recent recession are well studied, the causes of its origin are still misunderstood. This paper looks at two factors: (1) the blanket guarantees provided to the Icelandic banking system by various public agencies, and which fostered...

Luther and Salter argue for a regime where aggregate demand is restored by an increase in the money supply in response to an increase in the demand for money. They claim that, 1) monetary equilibrium policy prescriptions do not necessarily rely on sticky prices, 2) Cantillon effects can be neglected without consequence, 3) wealth redistributions fr...

Bank deposits have two characteristics: they are available on demand and at par value. Deposit redemptions face, at least given current technology, a lag between when they are requested and when they are delivered. This fact leads some to argue that as a deposit is not fully available, all deposits are, in fact, loans and that the legal obligation...

Barnett and Block (J Bus Ethics 18(2):179–194, 2011) argue that one cannot distinguish between deposits and loans due to the continuum problem of maturities and because future goods do not exist—both essential characteristics that distinguish deposit from loan contracts. In a similar way but leading to opposite conclusions (Cachanosky, forthcoming)...

We assess monetary equilibrium theory by focusing on its foundation—price stickiness—and answer several ancillary questions. Prices are sticky at times. Contra monetary equilibrium theorists, this is not a reason to advocate an issuance of fiduciary media to counteract the effects of a sluggish price adjustment process. Issuances of fiduciary media...

A wide and growing consensus views taxation as fundamentally coercive in nature. Regardless of the magnitude of the tax or the agents perpetrating it, this fundamental coercive element remains. Tax evasion must consequently be treated as an effort to convert this coercive behavior into voluntary transactions. By altering the conditions of payment a...

Anthony Evans and Steven Horwitz readily admit that their own understanding of monetary theory is imperfect, and do not even “attempt a rebuttal of [our] claims.” George Selgin accepts that some of the arguments we put forward in Bagus and Howden (2010) make for “interesting theory”. He fails to rebuff our claim that precautionary reserves are unab...

The European continent has long been plagued with what Americans may consider high rates of unemployment. This high natural level of unemployment has for some time attributed to several elements of European-type social assistance schemes. More generous unemployment insurance benefits remove an important incentive for European workers to find new jo...

'The current European recession is being offered as an excuse for a wider, more expansive centralized Europe. Failure to recognize the true causes of the recession - failed institutions that have plagued Europe for years, and will continue to do so if permitted to continue - will prolong the current malaise, and hold Europe back from its new future...

Informational cascades can be used to augment the existing Austrian business cycle theory. As first-order users of knowledge know the direct causes of a price change, they transmit this knowledge to second-order users through the price system. Banks with direct knowledge of the sources of the fresh liquidity during a credit-induced boom have knowle...

Recognizing different types of savings allows for a more fruitful analysis of the business cycle. Sustainable investment activities must be financed by an equivalent amount of savings, both in length of availability and quantity. Upward-sloping yield curves are a feature of the unhampered loanable funds market. Interest rates differ along this curv...

We explore several unaddressed issues in George Selgin's (1988) claim that the best monetary system to maintain monetary equi-librium is a fractional reserve free banking one. The claim that adverse clearing balances would limit credit expansion in a fractional reserve free banking system is more troublesome than previously reckoned. Both lengthene...

The current bust has brought a boom to at least one area: the subject of business ethics. While ethics in the general business realm is hotly debated, the monetary sphere is woefully neglected. Jörg Guido Hülsmann's (2009) The Ethics of Money Production has revived interest in applying an ethical foundation to monetary theory – specifically, bouts...

Attention has recently been drawn to compositional changes in the Federal Reserve System's asset holdings and in particular the deterioration of the balance sheet of the Fed in the face of the current crisis. However, an analysis of the balance sheet policies of the Eurosystem is still missing. In this article we fill this gap by analysing the Euro...

Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based...

Frequency probability theorists define an event’s probability distribution as the limit of a repeated set of trials belonging to a homogeneous collective. The subsets of this collective are events which we have deficient knowledge about on an individual level, although for the larger collective we have knowledge its aggregate behavior. Hence, proba...

The balance sheet developments of the Federal Reserve System have received increased attention during recent events. The Fed has expanded its balance sheet and also changed its composition in order to support the financial system. As a consequence the average quality of the assets have, on average, deteriorated. In a similar way, the ECB has recent...

Mises created an artificial construct, the evenly rotat-ing economy (ERE), from which to ascertain the source of entre-preneurial profit and loss. In particular, the ERE is characterized by two distinct elements. First is the elimination of the temporal element, second is the removal of changing market data. The sec-ond point necessarily arises fro...

Conditions of uncertainty have increasingly been perverted to describe quantifiable risk. Shackle (1952a) provides a basic framework that allows uncertainty to be factored for in cases of decision-making. Expanding upon this, we can see that the addition of a subjective probability distribution along the set of outcomes deemed possible by the agent...