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

632 Money, Bank Credit, and Economic Cyclesregulation in the form of a central bank intended to avoid theabuses the Banking School attempted to justify.PARNELL’S PRO-FREE-BANKING ARGUMENT AND THERESPONSES OF MCCULLOCH AND LONGFIELDWe will not embark here on a comprehensive account ofthe controversy between the Free-Banking and Central-BankingSchools: Vera C. Smith and others have already come upwith excellent studies on this topic. Nonetheless a few additionalpoints merit discussion. One thought we must keep inmind is that most advocates of free banking based their doctrineon the spurious, inflationist Banking School argumentscovered in the last section. Therefore, regardless of the effects afree-banking system might actually exert on the economy, thetheoretical foundation on which most free-banking advocatesbuilt their arguments was either entirely fallacious or, at best,highly questionable. Consequently, during this period theFree-Banking School made few contributions of any doctrinalvalue. One such contribution was the correct acknowledgmentthat, economically speaking, deposits and unbacked bills playthe same role. Another, one of particular analytical interest,was made by Sir Henry Parnell as early as 1827. According toParnell, a free-banking system would place natural limits onthe issuance of banknotes, due to the influence of the correspondinginterbank clearing house, which, on the model of theScottish banking system, Parnell believed would developwherever banks freely competed in the issuance of banknotes.Parnell argued that banks in a totally free banking systemwould be unable to endlessly expand their paper-moneybase without prompting their competitors to demand paymentof the bills, in specie, through a clearing house. Thusbanks, for fear of being unable to weather the correspondingoutflow of gold, would, in their own interest, adopt strictlimitations on the issuance of fiduciary media. 56 Parnell’s56 Henry Parnell, Observations on Paper Money, Banking and Other Trading,including those parts of the evidence taken before the Committee of the Houseof Commons which explained the Scotch system of banking (London: JamesRidgway, 1827), esp. pp. 86–88.