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

Central and Free Banking Theory 611Father Dempsey’s theoretical knowledge of money, capitaland cycles serves as the foundation of his study and representsa much sounder basis than the one Father Belda buildsupon. 17Interestingly, Dempsey does not develop his thesis with ananalysis of the views of those members most against banking(Saravia de la Calle, Martín de Azpilcueta, and Tomás de Mercado),but instead focuses on the writings of those most favorableto the banking business (Luis de Molina, Juan de Lugoand Lesio). Dempsey carries out an exegesis on the works ofthese authors and concludes that fractional-reserve bankingwould not be legitimate even from the standpoint of their own doctrines.These Salamancan authors defend certain traditionalprinciples concerning usury, and Dempsey supports his conclusionby applying such principles to banking and its economicconsequences, which, though unknown in the age ofthese scholastics, had been revealed in the theories of Misesand Hayek before Dempsey produced his treatise. Indeedthough we must acknowledge Molina and Lugo’s more favorabletreatment of banking, Dempsey expressly states that theloans banks generate ex nihilo in the course of their operationwith a fractional-reserve entail the creation of buying powerbacked by no prior voluntary saving or sacrifice. As a result,considerable harm is done to a vast number of third parties,who see the purchasing power of their monetary units fallowing to the inflationary expansion of banks. 18 According to17 In his introduction to Father Dempsey’s book, Schumpeter stronglyemphasizes Dempsey’s deep theoretical knowledge of and completefamiliarity with the economic doctrines of Ludwig von Mises, FriedrichA. Hayek, Wicksell, Keynes and others. Moreover, in his monumentalwork, The History of Economic Analysis, Schumpeter makes laudatorymention of Dempsey.18 The credit expansion results in the depreciation of whatevercirculating medium the bank deals in. Prices rise; the assetappreciates. The bank absolves its debt by paying out on thedeposit a currency of lesser value. . . . No single person would beconvicted by a Scholastic author of the sin of usury. But theprocess has operated usuriously; again we meet systematic or