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

634 Money, Bank Credit, and Economic Cyclestakes time, and there is always a (perhaps irresistible) temptationto overissue on the assumption that all other banks willsooner or later do the same. In this way the first bank tolaunch an expansionary policy derives the most profit andeventually establishes a position of advantage over its competitors.Regardless of the theoretical basis for the arguments ofParnell, or for those of McCulloch and Longfield, one thingseems certain: their debate sparked off a false controversybetween central-bank and free-banking supporters. We usethe term “false” because the theoretical discussion betweenthese two sides misses the heart of the whole problem. IndeedParnell is correct when he states that in a free-banking context,the clearinghouse system tends to act as a buffer against isolatedcases of expansion in the issuance of banknotes. At thesame time, McCulloch, and Longfield as well, are right inpointing out that Parnell’s argument fails if all banks simultaneouslyembark on a policy of expansion. Nevertheless CurrencySchool theorists felt their arguments against Parnell’sviews lent prima facie support to the establishment of a centralbank, which they believed would offer the most effective protectionagainst the abuses of fractional-reserve banking. Parnell,for his part, contented himself with defending free banking,though with the limits the interbank clearinghousesystem would set as a safeguard against banks’ recklessexpansion of their paper-money base. Nonetheless he failed torealize that, regardless of the arguments of McCulloch andLongfield, a return to traditional legal principles and a 100-percent reserve requirement would be much simpler andmore effective than any clearinghouse system. Having overlookedthis option, at least with regard to bank deposits, is themost crucial error committed by McCulloch and Longfield’sbranch of the Currency School as well. By endorsing the creationof a central bank, this faction inadvertently paved theway for the future strengthening of the very inflationary policiesits adversaries favored. 6060 A debate parallel to this one took place in Belgium and France betweenproponents of Free-Banking and the Banking School (Courcelle-Seneuil,