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

382 Money, Bank Credit, and Economic Cyclesincrease in loans, if not backed by a corresponding prior rise in voluntarysaving, will permit society to reduce the necessary sacrificesall processes of economic growth require, and foster and acceleratesustainable growth in the absence of a voluntary decisionmade by citizens to sacrifice and save. 91 Given that these arehighly significant conclusions, in the next section we will analyzetheir implications for the banking sector, particularly, themanner in which they explain that this sector cannot operateindependently (i.e., without a central bank) while maintaininga fractional reserve. Thus we will conclude the theoreticalanalysis we set out to produce in chapter 3: to demonstrate onthe basis of economic theory that it is impossible for the bankingsystem to insure itself against suspensions of paymentsand bankruptcy via a fractional-reserve requirement, since thesupposed insurance (the fractional-reserve requirement) isprecisely what triggers a process of credit expansion, boom,crisis and economic recession which invariably has a detrimentaleffect on banks’ solvency and ability to pay.91 In the eloquent words of Moss and Vaughn:Any real growth in the capital stock takes time and requiresvoluntary net savings. There is no way for an expansion of themoney supply in the form of bank credit to short-circuit the processof economic growth. (“Hayek’s Ricardo Effect: A Second Look,”p. 555; italics added)Perhaps the article in which Hayek most concisely and clearly explains thisentire process is “Price Expectations, Monetary Disturbances and Malinvestment,”published in 1933 and included in his book, Profits, Interest andInvestment, pp. 135–56. Along these lines we should also mention the workof Roger W. Garrison, who vividly illustrated the Austrian theory of capitaland of the cycle and compared it with the most common diagrams usedin macroeconomics textbooks to present the classical and Keynesian models,especially, “Austrian Macroeconomics: A Diagrammatical Exposition,”originally published on pp. 167–201 of the book, New Directions in AustrianEconomics, Louis M. Spadaro, ed. (Kansas City: Sheed Andrews andMcMeel, 1978; The Institute for Humane Studies, 1978, as an independentmonograph), and the article by Ludwig M. Lachmann, “A Reconsiderationof the Austrian Theory of Industrial Fluctuations,” originally published inEconomica 7 (May 1940), and included on pp. 267–84 of Lachmann’s book,Capital, Expectations and the Market Process: Essays on the Theory of the MarketEconomy (Kansas City: Sheed Andrews and McMeel, 1977). Finally, seeGarrison’s book, Time and Money.