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

614 Money, Bank Credit, and Economic Cyclesothers, it was not until John Law, Richard Cantillon, andDavid Hume had made their contributions that we findexpress reference to the problems posed by fractional-reservebanking with respect to both monetary issues and the real economicframework.We have already referred to John Law (1671–1729) elsewherein this book: in chapter 2 we pointed out his unusualpersonality, as well as his utopian, inflationist monetary proposals.Although he made some valuable original contributions,such as his opposition to Locke’s nominalist, conventionaltheory on the origin of money, 25 John Law also madethe first attempt to give a veneer of theoretical respectability tothe fallacious and popular idea that growth in the quantity ofmoney in circulation always stimulates economic activity. Infact, from the correct initial premise that money as a widelyacceptedmedium of exchange boosts commerce and encouragesthe division of labor, Law arrives at the erroneous conclusionthat the greater the amount of money in circulation,the larger the number of transactions and the higher the levelof economic activity. What follows would constitute anotherfatal error in his doctrine, namely the belief that the moneysupply must at all times match the “demand” for it, specificallythe number of inhabitants and the level of economicactivity. This implies that unless the amount of money in circulationkeeps pace with economic activity, the latter willdecline and unemployment will rise. 26 This theory of Law’s,vol. 4; and also in Several Papers Relating to Money, Interest, and Trade,Etcetera (New York: Augustus M. Kelley, 1968). Locke was the first inEngland to introduce the idea that the value of the monetary unit is ultimatelydetermined by the amount of money in circulation.25 We must remember that, according to Carl Menger, Law was the firstto correctly formulate the evolutionist theory on the origin of money.26 See John Law, Money and Trade Considered: With a Proposal for Supplyingthe Nation with Money (Edinburgh: A. Anderson, 1705; New York:Augustus M. Kelley, 1966). In Law’s own words:The quantity of money in a state must be adjusted to the numberof its inhabitants, . . . One million can create employmentfor only a limited number of persons . . . a larger amount ofmoney can create employment for more people than a smaller