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

638 Money, Bank Credit, and Economic Cyclestheir approach to the debate between central-banking andfree-banking supporters. Although interbank clearing mechanismsand continuous public supervision would tend to limitcredit expansion in a fractional-reserve free-banking system,they would be unable to prevent it completely, and bank crisesand economic recessions would inevitably arise. There is nodoubt that crises and recessions provide politicians and technocratswith an ideal opportunity to orchestrate central-bankintervention. Therefore it is obvious that the very existence of afractional-reserve banking system invariably leads to the emergenceof a central bank as a lender of last resort. Until traditional legalprinciples are reestablished, along with a 100-percent reserverequirement in banking, it will be practically inconceivable forthe central bank to disappear (in other words, it willinevitably arise and endure).At the same time, the establishment of a central bank tomeet crises tends to worsen economic recessions. The existenceof a lender of last resort aggravates expansionaryprocesses and makes them much more rapid and lengthy thanthey would be in a fractional-reserve free-banking system(i.e., with no central bank). Therefore it is paradoxical toclaim that the correct treatment of economic and bank crisesdepends on the existence of a central bank, when the centralbank is ultimately the main culprit in dragging out and exacerbatingcrises. Nevertheless let us remember that even if theintroduction of a fractional-reserve free-banking system wereto tame crises somewhat, it could not completely eliminatethem, and the different economic agents involved (mainly thebankers and citizens potentially harmed in each crisis)would inevitably urge the establishment of a central bank.The only way to end this vicious circle is to recognize that the originof the entire problem lies in fractional-reserve banking. In factthe reestablishment of a 100-percent reserve requirementwould not only avoid bank crises and recurrent economicrecessions, but it would also invalidate this third argument,one of the stalest invoked to justify the existence of the centralbank.Finally, two additional, subsidiary arguments in favor ofthe central bank have been expressed. The first refers to the