Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

The Credit Expansion Process 171recently managed to recover from it. 2 And once again, morerecently (in the summer of 1997), an acute financial crisis devastatedthe chief Asian markets, threatening to spread to therest of the world. A few years later (since 2001) the three maineconomic areas of the world (the United States, Europe, andJapan) have simultaneously entered into a recession. Again,since 2007 the most important financial crisis and economicrecession since World War II is affecting most world economies.The purpose of the economic analysis of law and legal regulationsis to examine the role the latter play in the spontaneousprocesses of social interaction. Our economic analysisof the monetary bank-deposit contract will reveal the resultsof applying traditional legal principles (including a 100-percentreserve requirement) to the monetary irregular-depositcontract. At the same time, it will bring to light the damaging,unforeseen consequences that follow from the fact that, in violationof these principles, bankers have been permitted tomake self-interested use of demand deposits. Until now theseeffects have gone mainly unnoticed.We will now see how bankers’ use of demand depositsenables them to create bank deposits (that is, money) and in turn,loans (purchasing power transferred to borrowers, whether businessmenor consumers) from nothing. These deposits and loans2 It is also interesting to note that the monetary and financial excesseswhich provoked this crisis stemmed mainly from the policies applied inthe latter 1980s by the supposedly neoliberal administrations of theUnited States and the United Kingdom. For example, Margaret Thatcherrecently acknowledged that the key economic problem of her term inoffice originated “on the ‘demand side’ as money and credit expandedtoo rapidly and sent the prices of assets soaring.” See MargaretThatcher, The Downing Street Years (New York: HarperCollins, 1993), p.668. In addition, in the field of money and credit, the United Kingdommerely followed the process of irresponsibility that had been initiated inthe United States during the second Reagan administration. If possible,these events indicate even more plainly the importance of advancingtheory to prevent other political authorities (even those with pro freemarketviews) from committing the same errors as Reagan and Thatcherand to allow them to clearly identify the type of monetary and bankingsystem appropriate for a free society, something many people with alaissez-faire stance remain distinctly unsure about.