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

8CENTRAL AND FREEBANKING THEORYThis chapter contains a theoretical analysis of the argumentsraised for and against both central and freebanking throughout the history of economic thought.To begin we will review the theoretical debate between thosein favor of a privileged banking system, i.e., one not subject totraditional legal principles and therefore capable of expandingcredit (the Banking School), and those theorists who havealways contended that banks should follow universal rulesand principles (the Currency School). 1 The analysis and evaluationof the theoretical contributions of both schools will1 The definitions of “Banking School” and “Currency School” offered inthe text basically coincide with those Anna J. Schwartz proposes.According to Schwartz, theorists of the Currency School believe monetarypolicy should be disciplined and subject to general legal rules andprinciples, while members of the Banking School generally advocategranting bankers (and eventually the central bank) complete discretionaryfreedom to act and even to disregard traditional legal principles.In fact Anna J. Schwartz notes that the whole controversy centers onwhetherpolicy should be governed by rules (espoused by adherentsof the Currency School), or whether the authorities shouldallow discretion (espoused by adherents of the BankingSchool). (Anna J. Schwartz’s article, “Banking School, CurrencySchool, Free Banking School,” which appeared in volume1 of The New Palgrave: Dictionary of Money and Finance[London: Macmillan, 1992], pp. 148–51)601