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

470 Money, Bank Credit, and Economic Cyclesmonetary and credit system, the expansion of which, at alltimes, would “guarantee” economic development. Specifically,Hayek asserted that economic crises arosefrom the very nature of the modern organization of credit. Solong as we make use of bank credit as a means of furtheringeconomic development we shall have to put up with theresulting trade cycles. They are, in a sense, the price we payfor a speed of development exceeding that which peoplewould voluntarily make possible through their savings, andwhich therefore has to be extorted from them. And even if itis a mistake—as the recurrence of crises would demonstrate—tosuppose that we can, in this way, overcome allobstacles standing in the way of progress, it is at least conceivablethat the non-economic factors of progress, such astechnical and commercial knowledge, are thereby benefitedin a way which we should be reluctant to forgo. 7474 Hayek, Monetary Theory and the Trade Cycle, pp. 189–90. In 1929 theyoung Hayek added that, in his opinion, a rigid banking system wouldprevent crises, but “the stability of the economic system would beobtained at the price of curbing economic progress.” He concluded,It is no exaggeration to say that not only would it be impossibleto put such a scheme into practice in the present state ofeconomic enlightenment of the public, but even its theoreticaljustification would be doubtful. (Ibid., p. 191)Hayek himself recognized that his conclusion rested more on intuitionand non-economic factors than on a rigorous theoretical analysis, andtherefore it is not surprising that only a few years later, in Prices and Productionand in Monetary Nationalism and International Stability, hechanged his mind, proposed a constant money supply and advocatedthe demand for a 100-percent reserve requirement in banking. In“Hayek, Business Cycles and Fractional Reserve Banking: Continuingthe De-Homogenization Process,” The Review of Austrian Economics 9,no. 1 (1996): 77–94, Walter Block and Kenneth M. Garschina level penetratingcriticism against these statements the young Hayek made in1929. However, on reflection, perhaps Hayek’s comments should beunderstood in a different light. As early as 1925 he proposed, as a radicalsolution to economic cycles, a return to the prescriptions of the BankCharter Act of 1844 and the establishment of a 100-percent reserverequirement for demand deposits held by banks. Thus maybe it wouldbe wiser to interpret the assertions Hayek made in 1929 (in MonetaryTheory and the Trade Cycle) in the context of the lecture given before the