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

648 Money, Bank Credit, and Economic Cyclesas lender of last resort, would guarantee their survival intimes of trouble. In this way the interests of private bankerscame to coincide with those of the state and its central bank,and a symbiosis formed between the two. The state obtainseasy financing in the form of loans and inflation, the cost ofwhich goes unnoticed by the citizens, who do not initiallyexperience a heavier tax burden. Private bankers gladly acceptthe central bank’s existence and the rules it imposes, sincebankers realize the entire framework of their business wouldultimately collapse without the support of an official institutionto provide the necessary liquidity once the “inevitable”bank crises and economic recessions hit.Therefore we can conclude with Vera Smith that the centralbank is not a spontaneous result of the market process.Instead the state has coercively imposed it in order to achievecertain objectives (particularly easy financing and the orchestrationof inflationary policies, which are always very popular),all with the acquiescence or support of private banks,which in this area have almost always acted as the government’saccomplices in the past. 7272 A central bank is not a natural product of banking development.It is imposed from outside or comes into being as theresult of Government favours. This factor is responsible formarked effects on the whole currency and credit structurewhich brings it into sharp contrast with what would happenunder a system of free banking from which Government protectionwas absent. (Smith, The Rationale of Central Banking andthe Free Banking Alternative, p. 169)Thus we accept the hypothesis of Professor Charles Goodhart (see footnote73), who believes the emergence of the central bank to be a necessaryconsequence of the shift from a system of commodity money to asystem of fiduciary money. We accept this hypothesis as long asacknowledgment is made to the effect that such a shift is not a spontaneousresult of the market, but on the contrary, an inevitable outcome ofthe violation of traditional legal principles (100-percent reserve ratio ondemand deposits), which are essential to the correct functioning of anyfree market. The only serious flaw we see in Vera Smith’s book lies in theauthor’s failure to fully recognize that the central-bank system is simplythe logical and unavoidable consequence of private bankers’ gradual