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

Central and Free Banking Theory 663Furthermore, although we cannot refer to any trueinstance in which a central bank has overseen a system of privatebanks which have operated with a 100 percent reserve,such a system would also be subject to the political influencesand lobby pressures studied by the Public Choice School. Itwould be naive to believe that central bankers with the powerto issue money would desire and be able to develop a stable,undistorted monetary policy, even if they supervised a privatebanking system which functioned with a 100-percent reserverequirement. The authority to issue money poses such anoverwhelming temptation that governments and special interestgroups would be unable to resist taking advantage of it.Therefore, even if the central bank did not compound itserrors through a fractional-reserve banking system, it wouldstill face the constant risk of succumbing to pressure frompoliticians and lobbyists eager to take advantage of the centralbank’s power in order to accomplish the political goalsdeemed most appropriate at any particular moment.In short we must acknowledge that because the privilegeof fractional-reserve banking is absent in the model covered inthis section, most of the intertemporal discoordination behindeconomic cycles is absent there as well. Nevertheless multiplepossibilities of intratemporal discoordination remain, owingto the injection into the economic system of new monetaryunits created by the central bank, and regardless of the specificmethod used to inject this new money into society (financingpublic spending, etc.). In addition, the effects examined by thePublic Choice School would play a key role in these intratemporalmaladjustments. Indeed it is almost inevitable that thecentral bank’s power to issue money should be politicallyexploited by different social, economic, and political groups,with the resulting distortion of the productive structure.Though monetary policy would certainly be more predictableand less distorting if private banks maintained a 100 percentmoney in circulation would exert no effect, except to proportionallyboost the prices of all goods, services and factors of production. All realconditions which could initially be cited as justification for an increasein the money supply would remain unaltered.