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

628 Money, Bank Credit, and Economic CyclesCurrency School theorists provided a valid explanation of therecurring phases of boom and recession which plagued theBritish economy in the 1830s and 1840s: the booms had theirroots in credit expansion which the Bank of England initiatedand the other British banks continued. Gold systematicallyflowed out of the United Kingdom whenever her trading partnerseither did not engage in credit expansion or did so at aslower pace than Britain, where the fractional-reserve bankingsystem was comparatively more developed. Each of the argumentsBanking School theorists devised in their attempt torefute the Currency School’s central idea (i.e., that the outflowof gold and cash from Great Britain was the inevitable consequenceof domestic credit expansion) failed miserably. Howeverdefenders of the Currency School position made threeserious mistakes which in the long run proved fatal. First, theyfailed to realize that bank deposits play exactly the same roleas banknotes unbacked by specie. Second, they were unable tocombine their sound monetary theory with a complete explanationof the trade cycle. They merely scratched the surface ofthe problem, and, lacking an adequate theory of capital, wereunable to perceive that bank credit expansion exerts a negativeinfluence on the different capital-goods stages in anation’s productive structure. They did not analyze in detailthe existing relationship between variations in the money supplyand the market rate of interest, and thus they implicitlyrelied on the naive, mistaken assumption that money could beThinking. In particular we must cite the following: Samuel Jones Lloyd(Lord Overstone), Reflections Suggested by a Perusal of Mr. J. HorseleyPalmer’s Pamphlet on the Causes and Consequences of the Pressure on theMoney Market (London: P. Richardson 1837); later reprinted by J.R.McCulloch in his Tracts and Other Publications on Metallic and Paper Currency,by the Right Hon. Lord Overstone (London: Harrison and Sons1857). Also George Warde Norman, Remarks upon some Prevalent Errorswith respect to Currency and Banking, and Suggestions to the Legislature andthe Public as to the Improvement in the Monetary System (London: P.Richardson 1838); and especially Robert Torrens (perhaps the finest CurrencySchool theorist), A Letter to the Right Hon. Lord Viscount Melbourne,on the Causes of the Recent Derangement in the Money Market, and on BankReform (London: Longman, Rees, Orme, Brown and Green, 1837).