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

Central and Free Banking Theory 643views of Tellkampf and the American school. Hübnerobserved that the less regulated banks were, the less frequenttheir solvency problems tended to be. He felt the choice wasbetween a system of privileged banks protected by a centralbank and apt to encourage irresponsible practices, and a freebankingsystem with no central bank to confer any privilegesor protection. In this second system, each bank would necessarilybe responsible for its own policies, and consequentlybankers would act in a more prudent way. According to Hübner,the final objective should be an end to the issuance ofbanknotes not backed 100 percent by specie. Nevertheless, inlight of the current situation, he believed the fastest and mosteffective way to move toward the ideal system was throughfree banking, in which each bank would be required to fulfillits obligations entirely. 67As early as 1867, the notable theorist Philip Joseph Geyerformulated a theory to explain economic cycles (a precursor tothe theory proposed in this book) which Mises and Hayekwould later carry to its logical conclusion. In fact Geyer impeccablysummarises the defects of the fractional-reserve bankingsystem and describes how it provokes economic crises. Accordingto Geyer, the banking system produces “artificial capital”(künstliches Kapital), which refers precisely to fiduciary mediagenerated by banks and unbacked by real wealth from voluntarysaving. Geyer explains why a boom follows and mustinevitably reverse in the form of a bank crisis and an economicrecession. 68 Finally, like Hübner, Otto Michaelis defended afor the future would not also have been best in the past. We believe theadvantages of the issuance of fiduciary media in the past were few comparedwith the severe damage it caused in the form of economic crisesand recessions, and especially with the gross inadequacies of our currentfinancial system, which is a result of those past errors.67 See Otto Hübner, Die Banken, published by the author in Leipzig in1853 and 1854.68 Philip Geyer, Theorie und Praxis des Zettelbankwesens nebst einer Charakteristikder Englischen, Französischen und Preussischen Bank (Munich:Fleischmann’s Buchhandlung, 1867). See also Geyer’s book, Banken undKrisen (Leipzig: T.O. Weigel, 1865). Vera C. Smith criticizes Geyer andTellkampf’s proposal to abolish the issuance of fiduciary media and