of MV=PT, where you can counteract a fall in V by increasing M. He claims that this would happen operationally via loans, but I think that's impossible. It could happen if banks just started crediting their depositor's accounts though. So they would hike up interest rates to enrich depositors, not to generate new loans. "He seems to assume that banks can force loans on credible borrowers. Ignores the fact that, one sentence earlier, he himself asserts that flow is going down, which to me means that people are not taking on additional debt." I am not the clearest on this but I think he also says that should the bank's money rise in value relative to other assets (deflation) the bank would buy up assets until the banks money stops appreciating relative to the other assets. In a deflationary environment (as you describe) the real debt burden on households grows as they try to increase their savings. Debt ends up being written down, which will decapitalize banks (assuming that, in this model, they are extending credit at all). Banks will find that their equity gets written down as their currency "appreciates" and their borrowers default. To put it another way, if banks lend secured, then in deflation, they simply take over all the collateral. They are welcome to it, as prices fall to what an unlevered buyer would pay. JKH Reply: November 2nd, 2009 at 4:49 pm He says free banking can exist under either a fixed or floating rate