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

658 Money, Bank Credit, and Economic Cyclesmaterial resources, to realize this objective. Nevertheless thefailure of such efforts could not be more obvious. 84It is impossible for the central bank, as a financial centralplanningagency, to somehow carry out the exact functionprivate money would fulfill in a free market subject to legalprinciples. The central bank not only lacks the necessaryinformation, but its mere existence tends to amplify the distorting,expansionary effects of fractional-reserve banking,giving rise in the market to severe intertemporal discoordinationwhich, in most cases, not even the central bank is ableto detect until it is too late. Even central-bank defenders, likeCharles Goodhart, have been obliged to admit that, contraryto the implications of their equilibrium models, and despiteall efforts made, in practice it is almost impossible for central-bankofficials to adequately coordinate the supply of anddemand for money, given the highly changeable, unpredictable,seasonal behavior of the multiple variables theywork with. For it is exceedingly difficult, if not impossible, tomanipulate the so-called “monetary base” and other aggregatesand guides, such as the price index and rates of interestand exchange, without instigating erratic and destabilizingmonetary policies. Furthermore Goodhart acknowledgesthat central banks are subject to the same pressures andforces that influence all other bureaucratic agencies, forceswhich have been studied by the Public Choice School.84 Thus the monetary-policy error which most contributed to the appearanceof the Great Depression was that committed by European centralbanks and the American Federal Reserve during the 1920s. It was not,as Stephen Horwitz indicates and Milton Friedman and Anna Schwartzdid before him, that the central bank, following the stock-market crashof 1929, failed to properly respond to a 30 percent decrease in the quantityof money in circulation. As we know, the crisis erupted because priorcredit and monetary expansion caused distortions in the productivestructure, not because the corresponding reversion process invariablybrought deflation with it. Horwitz’s error in interpretation, along with hisdefense of the arguments invoked by members of the modern Fractional-Reserve Free-Banking School, appear in his article, “Keynes’ Special Theory,”in Critical Review: A Journal of Books and Ideas 3, nos. 3 and 4 (Summer–Autumn,1989): 411–34, esp. p. 425.