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

Central and Free Banking Theory 641Cernuschi’s doctrine had only two flaws: it referredmerely to banknotes and ignored bank deposits. And furthermore,it was not so radical as Modeste’s who considered fractional-reservefree banking a fraudulent business that shouldnot be allowed at all.While the French Currency School was establishing thisposition in favor of free banking and a 100-percent reserveratio, a number of German economists, among them Hübnerand Michaelis, were carrying out a more in-depth theoreticalanalysis which led to the same conclusions. In the UnitedStates, the panic of 1819 had sparked the formulation of a doctrineagainst both fractional-reserve banking and the establishmentof a central bank, and this doctrine strongly influencedthe above school of German-speakers. As we alreadyknow, in the U.S., Condy Raguet and others (William M.Gouge, John Taylor, John Randolph, Thomas Hart Benton,Martin Van Buren, etc.) developed a body of monetary doctrinehighly critical of banking. 64 These men correctly identifiedfractional-reserve banking as the ultimate cause of crisesand concluded that a return to a 100-percent reserve ratio wasAction, with the following comment: “[F]reedom in the issuance of banknoteswould have narrowed down the use of banknotes considerably ifit had not entirely suppressed it.” Mises, Human Action, p. 446. BankingSchool theorists in favor of free banking opposed Cernuschi. In Francethis school was led by Jean-Gustav Courcelle-Seneuil. See especially hisbook, La banque libre: exposé des fonctions du commerce de banque et de sonapplication à l’agriculture suivi de divers écrits de controverse sur la liberté desbanques (Paris: Guillaumin, 1867). The best account of Modeste’s andCernuschi’s doctrines (including an analysis of their differences) is thatof Oskari Juurikkala’s “The 1866 False Money Debate, in the Journal desÉconomistes: Déjà Vu for Austrians?” Quarterly Journal of Austrian Economics5, no. 4 (Winter, 2002): 43–55.64 Another voice in support of a banking system subject to a 100-percentreserve requirement was that of the famous Davy Crockett, the frontierhero-turned-senator, for whom fractional-reserve banking systems were“species of swindling on a large scale” (Skousen, The Economics of a PureGold Standard, p. 32). Similar views were held by Andrew Jackson, theabove-cited Martin Van Buren, Henry Harrison, and James K. Polk, allof whom would later become U.S. presidents.