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

664 Money, Bank Credit, and Economic Cyclesreserve, theorists who defend the conservation of the centralbank under these circumstances are naive in that they considerthat the government and different social groups woulddesire and be able to develop a stable, and (as far as possible)“neutral,” monetary policy. Even if banks kept a 100 percentreserve, the very existence of the central bank, with its tremendouspower to issue money, would attract all sorts of perversepolitical influences like a powerful magnet. 91(c) A fractional-reserve free-banking systemThe third and last system we will analyze in light of thetheory of the impossibility of socialism is a privileged freebankingsystem, i.e., one with no central bank, but with permissionto operate with a fractional reserve. The theory of theimpossibility of socialism also explains that the concession ofprivileges which allow certain social groups to violate traditionallegal principles produces the same widespread discoordinationas socialism, understood as any system of regular,institutional aggression toward the free exercise of entrepreneurship.We have devoted a significant portion of this book(chapters 4–7) to examining how the infringement of traditionallegal principles in connection with the monetary bankdepositcontract offers banks the possibility of expanding theircredit base even when society’s voluntary saving has notincreased. We have also seen that as a consequence, discoordinationarises between savers and investors and must reversein the form of a bank crisis and economic recession.The main clarification to be made concerning a fractionalreservefree-banking system is that the spontaneous marketprocesses which reverse the distorting effects of credit expansiontend to begin sooner in this system than in the presence91 The principal defenders of a private banking system based on a 100-percent reserve requirement and managed by a central bank include themembers of the Chicago School in the 1930s and, currently, MauriceAllais, a recipient of the Nobel Prize in Economics. In the next chapterwe will analyze their proposals in detail.