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

Central and Free Banking Theory 651and inefficiency which stem from the interventionist welfarestate characteristic of western economies.Likewise, the granting of privileges which conflict withtraditional legal principles prevents coordinated cooperationamong the different agents in society. Indeed traditional legalprinciples are essential to the coordinated, peaceful exercise ofentrepreneurship. Their systematic violation hinders the freecreativity of entrepreneurs, as well as the creation and transmissionof the information necessary to coordinate society.When these principles are disregarded, social maladjustmentsremain hidden and tend to worsen systematically. 76The inevitable outcome of states’ systematic coercion ofsociety and of the concession of privileges against traditionallegal principles is widespread social disorder and lack ofadjustment in all areas and at all levels of society which areaffected by such coercion and privileges. In fact both coercionand privileges encourage inaccurate information and irresponsibleacts, and both lead to the corruption of individualbehavioral habits subject to the rule of law, favor the developmentof the underground economy and, in short, cause andsustain all sorts of social maladjustments and conflicts.THE APPLICATION OF THE THEOREM OF THEIMPOSSIBILITY OF SOCIALISM TO THE CENTRAL BANKAND THE FRACTIONAL-RESERVE BANKING SYSTEMOne of the central theses of this book is that the theorem ofthe impossibility of socialism, and the Austrian analysis of thesocial discoordination which inevitably follows institutionalcoercion and the granting of privileges at variance with thelaw, are directly applicable to the financial and banking systemwhich has evolved in our economies. This system is basedon private fractional-reserve banking and is controlled by anofficial institution (the central bank) which has become thearchitect of monetary policy.76 A detailed analysis of all the theoretical conclusions outlined aboveappears in the first three chapters of Huerta de Soto, Socialismo, cálculoeconómico y función empresarial, pp. 21–155.