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

654 Money, Bank Credit, and Economic Cycles(a) A system based on a central bank which controls and oversees anetwork of private banks that operate with a fractional reserveThe system made up of a central bank and private bankingwith a fractional reserve is the most disruptive example of“central planning” in the financial sphere. 80 Indeed this systemis founded upon a privilege which private bankers enjoy(the use of a fractional-reserve ratio) and which naturallycauses distortions in the form of credit expansion, malinvestmentand recurrent cycles of boom and recession. Moreoverthe entire system is orchestrated, managed, and supported bya central bank which acts as lender of last resort and exercisessystematic, institutional coercion in the field of banking,finance and money.In providing banks with the necessary liquidity in times ofcrisis, the central bank tends to counteract the mechanismswhich work in a free market to spontaneously reverse theexpansionary effects of banking. (Such mechanisms consistprecisely of the rapid failure of the most expansionary andleast solvent banks.) Consequently the process of deposit creationand credit expansion (i.e., without the backing of real,voluntary savings) may be prolonged indefinitely, thus aggravatingits distortion of the productive structure and exacerbatingthe inevitable economic crises and recessions it creates.The system of financial planning which rests on the centralbank cannot possibly eliminate recurring economic cycles.The most it can do is to delay their appearance by creatingnew liquidity (and providing support to endangered banks intimes of crisis), at the cost of aggravating the inevitable economicrecessions. Sooner or later, the market always tends tospontaneously react and to reverse the effects of monetaryaggression unleashed on it, and therefore deliberate attemptsto prevent such effects via coercion (or the granting of privileges)are condemned to failure. The most these attempts canachieve is the postponement, and consequent worsening, ofthe necessary reversion and recovery, or economic crisis. They80 We obviously exclude completely nationalized banking systems(China, Cuba, etc.), which at any rate are of little significance nowadays.