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

Bank Credit Expansion and Its Effects on the Economic System 393focused on its most visible, short-term results (waves of optimism,economic booms). However what can be said of thebankers themselves, who throughout history have experiencednumerous bank runs and crises that have repetitivelyand seriously endangered their business or even ended it?Given that bankers have suffered first-hand the consequencesof operating with a fractional-reserve ratio, one might think itis in their own best interest to modify their practices and adaptthem to traditional legal principles (that is, a 100-percent cashreserve). Even Ludwig von Mises held this idea at first, 97 yethistorical experience, which shows that again and again bankshave relapsed into holding a fractional reserve (in spite of thehuge risks it entails), does not justify it, nor does the theoreticalanalysis. Indeed even when bankers are aware that fractional-reservebanking is condemned to failure in the long run,97 In 1928 Ludwig von Mises admitted:I could not understand why the banks didn’t learn from experience.I thought they would certainly persist in a policy ofcaution and restraint, if they were not led by outside circumstancesto abandon it. Only later did I become convinced thatit was useless to look to an outside stimulus for the change inthe conduct of the banks. Only later did I also become convincedthat fluctuations in general business conditions werecompletely dependent on the relationship of the quantity offiduciary media in circulation to demand. . . . We can readilyunderstand that the banks issuing fiduciary media, in orderto improve their chances for profit, may be ready to expandthe volume of credit granted and the number of notes issued.What calls for a special explanation is why attempts are madeagain and again to improve general economic conditions bythe expansion of circulation credit in spite of the spectacularfailure of such efforts in the past. The answer must run as follows:According to the prevailing ideology of businessmanand economist-politician, the reduction of the interest rate isconsidered an essential goal of economic policy. Moreover,the expansion of circulation credit is assumed to be the appropriatemeans to achieve this goal. (“Monetary Stabilizationand Cyclical Policy,” included in the book, On the Manipulationof Money and Credit, pp. 135–36)This work is the English translation of the important book Mises publishedin 1928 with the title, Geldwertstabilisierung und Konjunkturpolitik.