Patrick Barron has been a consultant to the banking industry since 1985. He teaches Bank Management Simulation at the Graduate School of Banking, University of Wisconsin, Madison and Austrian Economics at the University of Iowa. He has contributed a weekly essay in the Austrian vein to The Bulletin, Philadelphia since 2006. As president of the Right Approach Group, which offers free market solutions to current economic problem, he has spoken at economic conferences at the EU Parliament offices in Brussels, Belgium and Strasbourg, France.
What the WSJ and every mainstream economist in the nation refers to as "inflation" is merely an increase in prices. The only true inflation is inflation of the money supply. The Fed has absolute control over the monetary base; i.e., cash--wherever held, such as banks, or our wallets and cookie jars--plus bank reserve balance, which can be converted to cash. In our fractional reserve banking system the money supply is influenced more by bank lending, which creates money out of thin air. The Fed has much less control over this part of the money supply. At present, the banking system is awash in excess reserves; therefore, the banks, theoretically, could increase the money supply by vast amounts and the Fed could do very little about it. We Austrian school economists regard fractional banking as fraudulent and should be made illegal. Banking should be divided into two parts, deposit banking--with one hundred percent reserve backing--and loan banking, much like today's merchant banking. In such as system, assuming that the Fed either was not allowed to manipulate reserves or the Fed was scrapped and the nation returned to a gold standard, there would be no inflation and no credit/business cycle. We would have sound money and sound banking. There would be no need for the Fed, the FDIC, or any banking regulation. Banking would be subject to normal commercial law.