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

630 Money, Bank Credit, and Economic Cyclesencourage policies of monetary recklessness and financialexcesses much worse than those it was originally designed toprevent. 54Consequently, even though in terms of theory the BankingSchool was utterly defeated, in practice it ultimately triumphed.Indeed Peel’s Bank Charter Act failed because it did not prohibitthe issuance of new loans and deposits in the absence ofa 100 percent reserve. As a result, recurrent cycles of boom andrecession continued, and the proposals and theories of theCurrency School understandably lost a tremendous amount ofprestige. Therefore popular demands for inflationary policieswhich facilitate credit expansion, demands backed by the everhandy mercantilist theories of the Banking School, found abreeding ground in the central-bank-based system, which ultimatelybecame an essential instrument of an interventionist,planned credit and monetary policy invariably aimed at virtuallyunchecked monetary and credit expansion.Only Modeste, Cernuschi, Hübner, and Michaelis, followedby Ludwig von Mises and his much more profoundanalysis, saw that the Currency School’s recommendation ofcentral banking was mistaken and that the best, indeed theonly, way to uphold the school’s principles of sound moneywas to adopt a free banking system subject to private law (i.e.,to a 100-percent reserve requirement) and unbenefited byprivileges. However we will study this point in greater detailin the next section, in which we will examine the debatebetween supporters of free banking and those of central banking.54 We agree entirely with Pedro Schwartz when he classifies Keynes (andto a lesser extent, Marshall) as “Banking School” theorists who nonethelessdefended the central bank system (precisely to gain the maximum“flexibility” to expand the money supply). See Schwartz’s article, “Elmonopolio del banco central en la historia del pensamiento económico:un siglo de miopía en Inglaterra,” pp. 685–729, esp. p. 729.