Austrian Business Cycle Theory: Are 100 Percent Reserves Sufficient to Prevent a Business Cycle?

Authors in the Austrian tradition have made the credit expansion of a fractional reserve banking system as the prime cause of business cycles. Authors such as Selgin (1988) and White (1999) have argued that a solution to this problem would be a free banking system. They maintain that the competition between banks would limit the credit expansion effectively. Other authors such as Rothbard (1991) and Huerta de Soto (2006) have gone further and advocated a 100 percent reserve banking system ruling out credit expansion altogether. In this article it is argued that a 100 percent reserve system can still bring about business cycles through excessive maturity mismatching between deposits and loans.