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

Central and Free Banking Theory 6473THE “THEOREM OF THE IMPOSSIBILITY OF SOCIALISM”AND ITS APPLICATION TO THE CENTRAL BANKIn chapter 2 we saw that throughout history central bankshave emerged not as a result of the spontaneous, evolutionaryfree-market process, but as a consequence of deliberate governmentintervention in the banking sector. In fact the institutionof the central bank is rooted in the failure of publicauthorities to adequately define and defend depositors’ propertyrights; in other words, to put an end to bankers’ misuse ofthe money their customers entrust to them on deposit. Thisfailure gave rise to the development of fractional-reservebanking, a practice which, as we know, permits bankers to createnew monetary instruments ex nihilo, and thus to generatelarge profits. We are already familiar with the harmful effectssuch banking activity exerts on the economic structure in theform of malinvestment, severe crises, and recessions whichshould, in principle, justify particularly diligent care on thepart of governments to guarantee the fulfillment of traditionallegal principles (a 100-percent reserve requirement ondemand deposits). Nevertheless throughout history, far fromincreasing their zeal to ensure compliance with the law inbanking, governments have been the first to take advantage ofthe banking business, granting bankers many privileges. Inorder to cope with the perpetual fiscal difficulties created bytheir financial carelessness, governments have not only legalizedfractional-reserve banking via the corresponding privilege,but they have throughout history continually attemptedto take advantage of this set-up, either by requiring that alarge number of the loans created ex nihilo by the fractionalreservebanking system be given to the government itself, orby reserving all or part of the highly lucrative fractionalreservebanking business for themselves.For their part, private bankers themselves did not fail tonotice that their industry underwent recurrent panics and liquiditycrises which regularly endangered the continuity ofbankers’ lucrative business. Hence private bankers have beenthe first to request the establishment of a central bank which,