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

622 Money, Bank Credit, and Economic Cyclesonly Wicksell’s theory on the natural rate of interest, but alsomuch of the Austrian theory of the economic cycle. 41After Thornton’s, the most notable work was produced byDavid Ricardo, whose distrust of banks parallels Hume’s.Ricardo may be regarded as the official father of the EnglishCurrency School. In fact Ricardo strongly disapproved of theabuses committed by bankers in his day and particularlyresented the harm done to the lower and middle classes whenbanks were unable to honor their commitments. He deemedsuch phenomena the result of banking offenses, and while hedid not anticipate the precise development of the Austrian, orcirculation credit theory of the business cycle, he at leastunderstood that artificial processes of expansion and depressionstem from certain banking practices, namely theunchecked issuance of paper money unbacked by cash andthe injection of this money into the economy via credit expansion.42 In the following section we will examine in detail thekey principles of the Currency School, started by Ricardo, aswell as the main postulates of the Banking School. 43THE CONTROVERSY BETWEEN THE CURRENCY SCHOOLAND THE BANKING SCHOOLThe popular arguments raised by defenders of fractionalreservebanking from the days of the School of Salamanca41 Hayek, The Trend of Economic Thinking, pp. 194–95.42 Schwartz, “El monopolio del banco central en la historia del pensamientoeconómico: un siglo de miopía en Inglaterra,” p. 712.43 Ricardo’s chief banking contributions appear in his well-known book,Proposals for an Economical and Secure Currency (1816), which has beenreprinted in The Works and Correspondence of David Ricardo, Piero Sraffa,ed. (Cambridge: Cambridge University Press, 1951–1973), vol. 4, pp.34–106. Ricardo’s criticism of banks is present in, among other documents,a letter he wrote to Malthus on September 10, 1815. This letter isincluded in volume 4 of The Works, edited by Sraffa, p. 177. Again, wemust remember that Ricardo would never have advised a government torestore the parity of its devalued currency to predepreciation levels, as heclearly implies in his letter to John Wheatley of September 18, 1821 (containedin volume 9 of The Works, pp. 71–74). Hayek himself wrote in 1975: