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

A Critique of Monetarist and Keynesian Theories 585on a major role in modern economies because they act asfinancial intermediaries, but because they typically createloans, and thus deposits, ex nihilo, thereby increasing themoney supply. Hence it is not surprising that banks are capableof distorting the productive structure and the behavior ofeconomic agents, who find the great relative ease of acquiringpresent goods from a bank enormously tempting. In comparison,it is more difficult to obtain resources drawn from realvoluntary savings. Saving always involves greater initial sacrificeand discipline on the part of third-party savers, and it iscomparatively much harder to accomplish.Therefore it is absurd to maintain, as is sometimes heard,that owing to the insufficient development of the capital marketand of non-bank financial intermediaries, banks “have hadno choice” but to take on a prominent role in the financing ofproduction processes. Indeed the exact opposite is true.Banks’ expansionary capacity to grant loans from nothinginevitably robs the capital market and non-bank financialintermediaries of a significant part of their economic prominence,since the banking system, which can expand loanswithout anyone’s having to first sacrifice immediate consumptionby voluntarily saving, is always much more likelyto grant a loan.Once the general public begins to correctly identify theevils of bank credit expansion, to understand that the expansionprocess depends on a legal privilege no other economicagent enjoys, and to see that the process inevitably provokesconsecutive cycles of boom and depression, the public will beable to instigate a reform of the banking system. Such a reformwill be founded on the reestablishment of a 100-percentreserve requirement for demand deposits, i.e., on the applicationof traditional legal principles to banking operations. Oncethis reform has been introduced, the proper status will berestored to the capital market and to true financial intermediaries,i.e., non-bank intermediaries, who by their very nature,play in an economy free of special privileges for banks. See Luis ÁngelRojo, Teoría económica III, Class Notes and Syllabus, year 1970–1971(Madrid, 1970), pp. 13ff., and 90–96.