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

602 Money, Bank Credit, and Economic Cyclesalso provide us with a chance to study the controversybetween supporters of the central bank and defenders of afree banking system. We will see that at first members of theCurrency School by and large defended the central bank, andBanking School theorists favored a free banking system, yetin the end the inflationist doctrines of the Banking Schoolprevailed, ironically under the auspices of the central bank.Indeed one of the most important conclusions of our analysisis that the central bank, far from being a result of thespontaneous process of social cooperation, emerged as theinevitable consequence of a fractional-reserve private bankingsystem. In a fractional-reserve context it is privatebankers themselves who eventually demand a lender of lastresort to help them weather the cyclical economic crises andrecessions such a system provokes. We will wrap up thechapter with a look at the theorem of the impossibility ofsocialist economic calculation. When applied to central bankoperations, this theorem explains the problems of administrativebanking laws as we know them. Finally we will argue thatcurrent free-banking advocates usually make the mistake ofaccepting and justifying fractional-reserve practices and fail tosee that such a concession would not only inevitably lead tothe resurgence of central banks, but would also trigger cyclicalcrises harmful to the economy and society.1A CRITICAL ANALYSIS OF THE BANKING SCHOOLIn this section we will examine the theoretical argumentsadvocates of fractional-reserve banking have constructed tojustify such a system. Although these arguments have traditionallybeen considered a product of the Banking and CurrencySchool controversy which arose in England during thefirst half of the nineteenth century, the earliest arguments onfractional-reserve banking and the two opposing sides (thebanking view versus the currency view) can actually betraced back to contributions made by the theorists of theSchool of Salamanca in the sixteenth and seventeenth centuries.