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

612 Money, Bank Credit, and Economic CyclesDempsey, this ex nihilo generation of buying power, whichimplies no previous loss of purchasing power to other people,violates the essential legal principles Molina and Lugo themselveslay down and in this sense is reprehensible. Specifically,Dempsey asserts:We may conclude from this that a Scholastic of the seventeenthcentury viewing the modern monetary problemswould readily favor a 100-percent reserve plan, or a timelimit on the validity of money. A fixed money supply, or asupply altered only in accord with objective and calculatedcriteria, is a necessary condition to a meaningful just price ofmoney. 19Dempsey insists that bank credit expansion drives downthe purchasing power of money, and that therefore banks tendto return deposits in monetary units of increasingly reducedpurchasing power. This leads him to conclude that if membersof the School of Salamanca had possessed a detailed, theoreticalunderstanding of the functioning and implications of the economicprocess which fractional-reserve banking triggers, theneven Molina, Lesio, and Lugo would have condemned it as avast, harmful, and illegitimate process of institutional usury.Now that we have analyzed the main postures membersof the School of Salamanca adopted on banking, we will seehow their ideas were collected and developed in later centuriesby both continental European and Anglo-Saxonthinkers.institutional usury. . . . The modern situation to which theoristshave applied the concepts of diversion of natural andmoney interest, diversion of saving and investment, diversionof income disposition from tenable patterns by involuntarydisplacements, all these have a sufficient commonground with late medieval analysis to warrant the expression,“institutional usury,” for the movements heretofore describedin the above expressions. (Dempsey, Interest and Usury, pp.225 and 227–28; italics added)In short, Dempsey simply applies to banking the thesis Juan de Marianapresents in his work, Tratado y discurso sobre la moneda de vellón.19 Dempsey, Interest and Usury, p. 210.