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

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Central and Free Banking Theory 617After Cantillon, and aside from some interesting monetaryanalysis by Turgot, Montesquieu, and Galiani, 29 no importantreferences to banking appear until Hume makes his essentialcontributions.David Hume’s (1711–1776) treatment of monetary mattersis contained in three brief but comprehensive and illuminatingessays entitled “Of Money,” “Of Interest” and “Of the Balanceof Trade.” 30 Hume deserves special recognition for havingsuccessfully refuted John Law’s mercantilist fallacies by provingthat the quantity of money in circulation is irrelevant to economicactivity. Indeed Hume argues that the volume of moneyin circulation is unimportant and ultimately influences onlythe trend in nominal prices, as stated by the quantity theory ofmoney. To quote Hume: “The greater or less plenty of money isof no consequence; since the prices of commodities are alwaysproportioned to the plenty of money.” 31 Nevertheless Hume’s29 Ferdinando Galiani follows in Davanzati and Montanari’s footsteps,and his writings, included in Della moneta, rival even the works of Cantillonand Hume.30 These essays have been reprinted in splendid editions by Liberty Classics.See Hume, Essays: Moral, Political and Literary, pp. 281–327.31 See “Of Money,” ibid., p. 281. Even today this essential observation ofHume’s escapes some highly distinguished economists, as is clear fromthe following assertion Luis Ángel Rojo makes:From a social standpoint, the real money balances held by thepublic should be at a level where the social marginal productivityof the money is equal to the social marginal cost of producingit—a cost which is very low in a modern economy.From a private perspective, the overall possession of realmoney balances will reach a level where their private marginalproductivity—which, for the sake of simplicity, we mayassume to be equal to their social marginal productivity—isequal to the private opportunity cost of holding riches inmoney form. As the public will decide, based on personalstandards, the volume of real money balances they wish tomaintain, the amount actually held will tend to be lower thanthat which would be ideal from a social viewpoint. (LuisÁngel Rojo, Renta, precios y balanza de pagos [Madrid: AlianzaUniversidad, 1976], pp. 421–22)
618 Money, Bank Credit, and Economic Cyclesunqualified acknowledgment that the volume of money isinconsequential does not prevent him from correctly recognizingthat rises and falls in the amount of money in circulation dohave a profound effect on real economic activity, since thesechanges always influence primarily the structure of relativeprices, rather than the “general” price level. Indeed certainbusinessmen are always the first to receive the new money (orto experience a slump in their sales as a result of a decrease inthe money supply), and thus begins an artificial process ofboom (or recession) with far-reaching consequences for economicactivity. Hume maintains:In my opinion, it is only in this interval or intermediate situation,between the acquisition of money and rise of prices,that the encreasing quantity of gold and silver is favourableto industry. 32Although Hume lacks a theory of capital to show him howartificial rises in the quantity of money damage the productivestructure and trigger a recession, the inevitable reversal of theinitial expansionary effects of such rises, he correctly intuitsthe process and doubts that increases in credit expansion andin the issuance of paper money offer any long-term economicadvantage: “This has made me entertain a doubt concerningthe benefit of banks and paper-credit, which are so generallyesteemed advantageous to every nation.” 33 For this reasonHume condemns credit expansion in general and fractionalreservebanking in particular and advocates a strict 100-percentreserve requirement in banking, as we saw in chapter 2.Hume concludes:[T]o endeavour artificially to encrease such a credit, cannever be the interest of any trading nation; but must lay themIn this excerpt Luis Ángel Rojo not only views money as if it were a sortof factor of production, but he also fails to take into account that moneyfulfills both its individual and social functions perfectly, regardless of itsvolume. As Hume established, any amount of money is optimal.32 Hume, Essays, p. 286.33 Ibid., p. 284; italics added.
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MONEY,BANK CREDIT,ANDECONOMIC CYCLE
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CONTENTSPREFACE TO THE THIRD ENGLIS
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xiiMoney, Bank Credit, and Economic
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xivMoney, Bank Credit, and Economic
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xviMoney, Bank Credit, and Economic
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xviiiMoney, Bank Credit, and Econom
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PREFACE TO THESECOND ENGLISH EDITIO
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PREFACE TOTHE THIRDSPANISH EDITIONI
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Preface to the Third Spanish Editio
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xliiMoney, Bank Credit, and Economi
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INTRODUCTIONThe economic analysis o
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Introductionxlviiand foreign exchan
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IntroductionxlixThis book comprises
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Introductionrecurrent phenomenon. I
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Introductionand Professors Hans-Her
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2 Money, Bank Credit, and Economic
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4THE CREDITEXPANSION PROCESSThis ch
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6ADDITIONALCONSIDERATIONSON THE THE
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7A CRITIQUE OFMONETARIST ANDKEYNESI
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A Critique of Monetarist and Keynes
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9A PROPOSAL FOR BANKINGREFORM: THE
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BIBLIOGRAPHYAbrams, M.A., Money in
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Bibliography 815Bajo Fernández, M.
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Bibliography 817Borch, K.H., Econom
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Bibliography 819Coronel de Palma, L
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Bibliography 821N. Durlauf and Lawr
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Bibliography 823Galiani, F., Della
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Bibliography 825Graham, F.D., “Pa
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Bibliography 827——, Prices and
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Bibliography 829translation by N. K
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Bibliography 831——, “Keynes
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Bibliography 833Russian edition by
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Bibliography 835Keeler, J., “Empi
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Bibliography 837——, “On Crisi
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Bibliography 839——, “Professo
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Bibliography 841Miller, H.E., Banki
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Bibliography 843Neira, Alonzo, M.A.
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Bibliography 845Raguet, C., “Repo
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Bibliography 847——, “The Myth
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Bibliography 849——, “Banking
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Bibliography 851M.C. Marcuzzo (Chel
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Bibliography 853——, “A Critiq
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Bibliography 855Walker, A., The Sci
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INDEX OF SUBJECTSAccelerator princi
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Index of Subjects 859Banking reform
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Index of Subjects 861objection to t
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Index of Subjects 863Goal, concept
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Index of Subjects 865See also Fract
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Index of Subjects 867Plan, definiti
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Index of Subjects 869Tragedy of the
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