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

Introductionrecurrent phenomenon. I will endeavor to show that the centralbank did not emerge spontaneously as the result of marketinstitutions, but was forcibly imposed by the governmentand responds to the demands of powerful pressure groups. Iwill also examine the current financial system, which is basedon a central bank, and apply to it the analytical economic theoryof the impracticability of socialism. Indeed, the currentfinancial system rests on a monopoly one government agencyholds on the chief decisions regarding the type and quantityof money and credit to be created and injected into the economicsystem. Thus it constitutes a financial market system of“central planning” and therefore involves a high level of interventionand is to a great extent “socialist.” Sooner or later thesystem will inevitably run up against the impossibility ofsocialist economic calculation, the theorem of which maintainsit is impossible to coordinate any sphere of society, especiallythe financial sphere, via dictatorial mandates, given thatthe governing body (in this case the central bank) is incapableof obtaining the necessary and relevant information requiredto do so. The chapter concludes with a review of the recentcentral-banking/free-banking controversy. We will see thatmost current free-banking theorists have failed to realize thattheir plan loses much of its potential and theoretical weight ifnot accompanied by a call to return to traditional legal principles;that is, to banking with a 100-percent reserve requirement.Freedom must go hand-in-hand with responsibility andstrict observance of traditional legal principles.The ninth and last chapter presents an ideal, coherentmodel for a financial system which respects traditional legalprinciples and is thus based on the adoption of a 100-percentreserve requirement in banking. Also considered are the differentarguments made against my proposal. I criticize themand explain how the transition from the current system to theproposed ideal system could be carried out with a minimumof tension. A summary of main conclusions wraps up thebook, along with some additional considerations on theadvantages of the proposed financial system. The principlesstudied here are also applied to certain urgent practical issues,such as the construction of a new European monetary systemli