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

Central and Free Banking Theory 627The credits in current accounts or deposits of our banks arealso in their origin and effect perfectly assimilated to banknotes,and we cannot therefore but consider the aggregateamount of credits payable on demand standing on thebooks of the several banks as being part of the currency ofthe United States. 50Nevertheless despite this valuable contribution from theBanking School, i.e., the rediscovery that bank deposits andpaper money perform exactly the same economic function asspecie and cause the same problems, the rest of the BankingSchool doctrines were, as Mises asserted, seriously faulty.Banking School theorists were unable to coherently defendtheir contradictory ideas; they tried in vain to refute the quantitytheory of money; and they failed in their attempt todevelop an articulate interest rate theory. 51These Banking School doctrines met with fierce oppositionfrom defenders of the Currency School, who carried on a timehonoredtradition which dates back not only to the Salamancanscholastics who were most uncompromising in their viewson banking (Saravia de la Calle, Martín Azpilcueta and, to alesser extent, Tomás de Mercado), but also, as we have seen, toHume and Ricardo. The leading theorists of the nineteenthcenturyCurrency School were Robert Torrens, S.J. Lloyd (laterLord Overstone), J.R. McCulloch, and George W. Norman. 5250 Albert Gallatin, Considerations on the Currency and Banking System of theUnited States (Philadelphia: Carey and Lea, 1831), p. 31.51 It was the only merit of the Banking School that it recognizedthat what is called deposit currency is a money-substitute noless than banknotes. But except for this point, all the doctrinesof the Banking School were spurious. It was guided by contradictoryideas concerning money’s neutrality; it tried torefute the quantity theory of money by referring to a deus exmachina, the much talked about hoards, and it misconstruedentirely the problems of the rate of interest. (Mises, HumanAction, p. 440)52 The most valuable contributions from these authors are covered inHayek’s recently-published summary of the controversy between theBanking and Currency Schools. See chapter 12 of The Trend of Economic