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

620 Money, Bank Credit, and Economic Cyclesby the encrease of prices: But not being now collected intoany large masses or stocks, the disproportion between theborrowers and lenders is the same as formerly, and consequentlythe high interest returns. 36Hume’s two brief essays constitute as concise and correctan economic analysis as can be found. We may wonder howdifferent economic theory and social reality would have beenif Keynes and other such writers had read and understoodfrom the start these important contributions of Hume’s, andhad thus become immune to the outdated mercantilist ideaswhich, time and again, reappear and gain new acceptance. 37Compared to Hume’s, Adam Smith’s contributions mustlargely be considered an obvious step backward. Not onlydoes Smith express a much more positive opinion of papermoney and bank credit, but he also openly supports fractional-reservebanking. In fact Smith claims:What a bank can with propriety advance to a merchant orundertaker of any kind, is not, either the whole capital withwhich he trades, or even any considerable part of that capital;but that part of it only, which he would otherwise be obliged tokeep by him unemployed, and in ready money for answeringoccasional demands. 38The only restriction Smith places on the granting ofloans against demand deposits is that banks must use36 Ibid., pp. 305–06; italics added.37 Hayek has pointed out the surprising gaps in Keynes’s knowledge ofthe history of economic thought concerning monetary matters in eighteenth-and nineteenth-century England and has indicated that, hadKeynes’s knowledge been deeper, we would have been spared much ofthe clear regression Keynesian doctrines have represented. See F.A.Hayek, “The Campaign against Keynesian Inflation,” in New Studies inPhilosophy, Politics, Economics and the History of Ideas, p. 231.38 Adam Smith, An Inquiry into the Nature and Causes of the Wealth ofNations, vol. 1, p. 304; italics added. On the evolution of Adam Smith’sideas on banking, see James A. Gherity, “The Evolution of Adam Smith’sTheory of Banking,” History of Political Economy 26, no. 3 (Autumn,1994): 423–41.