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

Central and Free Banking Theory 623became more widespread and systematic in England duringthe first half of the nineteenth century, owing to the efforts ofthe so-called Banking School. 44 During that period a sizeablegroup of theorists (Parnell, Wilson, MacLeod, Tooke, Fullarton,etc.) formed, bringing together and systematizing thethree main tenets of the Banking School, namely: (a) that fractional-reservebanking is juridically and doctrinally justifiedand highly beneficial to the economy; (b) that the ideal monetarysystem is one which permits the expansion of the moneysupply as required by the “needs of trade,” and particularly toadjust to population and economic growth (this is the ideaJohn Law initially developed); and (c) that the fractionalreservebanking system, through credit expansion and theI ask myself often how different the economic history of theworld might have been if in the discussion of the years preceding1925 one English economist had remembered andpointed out this long-before published passage in one ofRicardo’s letters. (Hayek, New Studies in Philosophy, Politics,Economics and the History of Ideas, p. 199)In fact the fatal mistake manifest in the British post-war attempt toreturn to the gold standard abandoned during the First World War andto restore the pound to its previous value, lowered by wartime inflation,had already been revealed in a remarkably similar situation (followingthe Napoleonic wars) by David Ricardo a hundred years earlier. Ricardostated at that time that henever should advise a government to restore a currencywhich had been depreciated 30 percent to par; I should recommend,as you propose, but not in the same manner, thatthe currency should be fixed at the depreciated value by loweringthe standard, and that no farther deviations should takeplace. (David Ricardo, in the above-mentioned letter to JohnWheatley dated September 18, 1821, included in The Worksand Correspondence of David Ricardo, Sraffa, ed., vol. 9, p. 73;see also chap. 6, footnote 46)44 Actually, the main doctrines of the Banking School had already beenput forward, at least in embryonic form, by theorists of the Anti-BullionistSchool in eighteenth-century England. See chapter 5 (“The EarlyBullionist Controversy”) from Rothbard’s book, Classical Economics(Aldershot, U.K.: Edward Elgar 1995), pp. 159–274; and Hayek, TheTrend of Economic Thinking, vol. 3, chaps. 9–14.