Brad DeLong has a post on Paul Ryan’s hysterical reaction to QE3, which is worth reading just for this:

“Honest money” is a Ron Paul dog whistle: the good productive workers, the bad exploitative usurers, the necessity of a hard-money depression to cleanse the monetary colon–you know the drill.

But the Ron Paul link, in which he condemned fractional reserve banking, prodded me to ask a question I’ve been meaning to ask: How do the Austrians propose dealing with money market funds?

I mean, it has always been a peculiarity of that school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government. This is historically wrong, but maybe the actual history of banking is deep enough in the past for that wrongness to get missed.

But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.

So are such funds illegitimate? What about repo, which has many of the same features?

One of the key lessons of the 2008 crisis was precisely that banks are defined by what they do, not by what they look like, and there are a whole range of financial arrangements that in economic terms act a lot like fractional reserve banking. So would a Ron Paul regulatory regime have teams of “honest money” inquisitors fanning across the landscape, chasing and closing down anyone illegitimately creating claims that might compete with gold and silver? How is this supposed to work?

OK, I don’t expect a serious answer. But it’s scary that this has become the more or less official doctrine of the GOP.