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

Central and Free Banking Theory 649The above explains the historical appearance of the centralbank, which is founded on the complicity and community ofinterests which have traditionally united governments andbankers and which fully account for the intimate “understanding”and “cooperation” between these two types of institutions.Nowadays this relationship, with only slight variations,is evident in all western countries and in almost allsituations. The survival of private banks is guaranteed by thecentral bank, and thus this institution, and ultimately the governmentitself, exercises close supervision and political andeconomic control over banks. Moreover the central bank isintended to direct the monetary and credit policy of everycountry, with the aim of achieving certain economic policygoals. In the next section we will see why it is theoreticallyimpossible for a central bank to sustain a monetary and creditsystem which produces no severe economic maladjustmentsand disturbances. 73and surreptitious introduction (in historical complicity with governments)of the fractional-reserve banking system. It is unfortunate thatSmith neglects to devote some attention to the proposals for a 100-percentreserve requirement which were already circulating at the time shewrote the book. If she had examined these proposals, she would haverealized that a true system of free-banking requires the re-establishmentof a 100-percent reserve ratio on demand deposits. As we will see, manypresent-day theorists who defend the free-banking system commit thesame error.73 The classic work on the evolution of central banks is Charles Goodhart’sThe Evolution of Central Banks, 2nd ed. (Cambridge, Mass.: MITPress, 1990), esp. pp. 85–103. A brief, helpful outline of the emergenceand development of central banks appears on pp. 9ff. of Tedde deLorca’s book, El Banco de San Carlos, 1782–1822. Ramón Santillana providesa good illustration of the formation of the central bank in nineteenth-centurySpain to cope with the financial difficulties of the state,which was continually forced to take advantage of the privileges ofmoney creation (banknotes and deposits) enjoyed by the fractionalreservebanking industry. See Santillana’s book, Memoria histórica sobrelos bancos Nacional de San Carlos, Español de San Fernando, Isabel II, Nuevode San Fernando, y de España (reprinted by the Banco de España [Madrid,1982]), esp. pp. 1, 3, 132, 236 and 237.