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

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Central and Free Banking Theory 661will be unsuccessful because from the start they ignore theessential fact that the officials responsible for governmentagencies, whether state-owned companies or central banks,cannot in their daily lives escape from the bureaucratic environmentin which they work, nor can they overcome the inherentignorance of their situation. János Kornai makes the followingappropriate, critical comments concerning attempts to developan artificial incentive system to make the behavior of functionariesmore efficient:An artificial incentive scheme, supported by rewards andpenalties, can be superimposed. A scheme may supportsome of the unavowed motives just mentioned. But if itgets into conflict with them, vacillation and ambiguity mayfollow. The organization’s leaders will try to influencethose who impose the incentive scheme or will try to evadethe rules. . . . What emerges from this procedure is not asuccessfully simulated market, but the usual conflictbetween the regulator and the firms regulated by thebureaucracy. . . . Political bureaucracies have inner conflictsreflecting the divisions of society and the diverse pressuresof various social groups. They pursue their own individualand group interests, including the interests of the particularspecialized agency to which they belong. Power creates anirresistible temptation to make use of it. A bureaucrat mustbe interventionist because that is his role in society; it is dictatedby his situation. 88(b) A banking system which operates with a 100-percent reserveratio and is controlled by a central bankIn this system the distortion and discoordination whicharise from the central bank’s systematic intervention on thefinancial market would be lessened, since private bankswould no longer enjoy the privilege of functioning with afractional reserve. In this sense bank loans would necessarilyreflect economic agents’ true desires with regard to saving,88 János Kornai, “The Hungarian Reform Process,” Journal of EconomicLiterature 24, no. 4 (December 1986): 1726–27.
662 Money, Bank Credit, and Economic Cyclesand the distortion caused by credit expansion (i.e., unbackedby a prior increase in real, voluntary saving) would bechecked. Nevertheless we cannot conclude that all discoordinationgenerated by the central bank would disappear, sincethe mere existence of the central bank and its reliance on systematiccoercion (the imposition of legal-tender regulationsand a set monetary policy) would still have a damaging effecton the processes of social coordination.In this example the most critical discoordination would beintratemporal, rather than intertemporal, 89 because new moneycreated by the central bank and placed in the economic systemwould tend to affect the relative-price structure “horizontally.”In other words it would tend to engender a productive structurewhich, horizontally speaking, would not necessarily coincidewith the one consumers wish to sustain. A poor allocation ofresources would ensue, along with a need to reverse the effectsnew injections of money would exert on the economic system. 9089 Nonetheless we cannot completely rule out the possibility of intertemporaldistortions in this case. Even if banks are required to maintain a100 percent reserve, intertemporal distortions will inevitably occur if thecentral bank injects new money into the economic system via massiveopen-market purchases which directly affect securities markets, rates ofreturn, and hence, indirectly, the interest rate in the credit market.90 F.A. Hayek has explained that unemployment often stems from theexistence of intratemporal discrepancies between the distribution of thedemand for different consumer goods and services and the allocation oflabor and the other productive resources necessary to produce thesegoods. The creation and injection of new money by the central bank atdifferent points in the economic system tends to produce and aggravatesuch qualitative discoordination. This argument, which is illustratedand reinforced by fractional-reserve banking to the extent that it combinesintratemporal distortion with far more acute intertemporal discoordination,would still carry weight even if the central bank were todirect a banking system which operated with a 100-percent reserveratio. In this case any increase in the money supply brought about by thecentral bank to achieve its monetary-policy goals would always horizontallyor intratemporally distort the productive structure, unless (andthis is inconceivable in real life) the new money were equally distributedamong all economic agents. In this case the rise in the quantity of
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MONEY,BANK CREDIT,ANDECONOMIC CYCLE
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CONTENTSPREFACE TO THE THIRD ENGLIS
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xiiMoney, Bank Credit, and Economic
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xivMoney, Bank Credit, and Economic
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xviMoney, Bank Credit, and Economic
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xviiiMoney, Bank Credit, and Econom
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PREFACE TO THESECOND ENGLISH EDITIO
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Preface to the Second English Editi
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PREFACE TOTHE THIRDSPANISH EDITIONI
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Preface to the Third Spanish Editio
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xliiMoney, Bank Credit, and Economi
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INTRODUCTIONThe economic analysis o
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Introductionxlviiand foreign exchan
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IntroductionxlixThis book comprises
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Introductionrecurrent phenomenon. I
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Introductionand Professors Hans-Her
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2 Money, Bank Credit, and Economic
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100 Money, Bank Credit, and Economi
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4THE CREDITEXPANSION PROCESSThis ch
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The Credit Expansion Process 169dif
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The Credit Expansion Process 181Ban
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The Credit Expansion Process 187Nev
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The Credit Expansion Process 209Thi
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The Credit Expansion Process 221(39
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6ADDITIONALCONSIDERATIONSON THE THE
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Additional Considerations on the Th
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7A CRITIQUE OFMONETARIST ANDKEYNESI
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A Critique of Monetarist and Keynes
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8CENTRAL AND FREEBANKING THEORYThis
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Central and Free Banking Theory 603
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9A PROPOSAL FOR BANKINGREFORM: THE
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A Proposal for Banking Reform:The T
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BIBLIOGRAPHYAbrams, M.A., Money in
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Bibliography 815Bajo Fernández, M.
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Bibliography 817Borch, K.H., Econom
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Bibliography 819Coronel de Palma, L
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Bibliography 821N. Durlauf and Lawr
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Bibliography 823Galiani, F., Della
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Bibliography 825Graham, F.D., “Pa
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Bibliography 827——, Prices and
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Bibliography 829translation by N. K
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Bibliography 831——, “Keynes
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Bibliography 833Russian edition by
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Bibliography 835Keeler, J., “Empi
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Bibliography 837——, “On Crisi
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Bibliography 839——, “Professo
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Bibliography 841Miller, H.E., Banki
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Bibliography 843Neira, Alonzo, M.A.
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Bibliography 845Raguet, C., “Repo
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Bibliography 847——, “The Myth
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Bibliography 849——, “Banking
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Bibliography 851M.C. Marcuzzo (Chel
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Bibliography 853——, “A Critiq
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Bibliography 855Walker, A., The Sci
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INDEX OF SUBJECTSAccelerator princi
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Index of Subjects 859Banking reform
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Index of Subjects 861objection to t
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Index of Subjects 863Goal, concept
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Index of Subjects 865See also Fract
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Index of Subjects 867Plan, definiti
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Index of Subjects 869Tragedy of the
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