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

666 Money, Bank Credit, and Economic Cycleseffects on the real economy by provoking bank crises and economicrecessions. 93Not only is fractional-reserve free-banking incapable ofavoiding credit expansion and the appearance of cycles, but itactually tempts bankers in general to expand their loans, andthe result is a policy in which all bankers, to one extent oranother, are carried away by optimism in the granting of loansand in the creation of deposits. 94 It is a well-known fact thatwhenever property rights are not adequately defined—andthis is the case with fractional-reserve banking, which by definitioninvolves the violation of depositors’ traditional propertyrights—the “tragedy of the commons” effect tends toappear. 95 Thus a banker who expands his loans brings in ahandsome, and larger, profit (if his bank does not fail), while93 Charles A.E. Goodhart states: “There were plenty of banking crisesand panics prior to the formation of central banks” and cites O.B.W.Sprague’s book, History of Crises and the National Banking System, firstpublished in 1910 and reprinted in New Jersey by Augustus M. Kelleyin 1977. See Charles A.E. Goodhart, “What Should Central Banks Do?What Should be their Macroeconomic Objectives and Operations?” p.1435. See also the article by the same author, “The Free Banking Challengeto Central Banks,” published in Critical Review 8, no. 3 (Summer1994): 411–25. A collection of the most important writings of CharlesA.E. Goodhart has been published as The Central Bank and the FinancialSystem (Cambridge, Mass.: MIT Press, 1995).94 On banks’ optimism and the “passive inflationism” which arises frombankers’ fear of aborting artificial expansion in time, see Mises, HumanAction, pp. 572–73. Moreover Mises argues that benefits derived fromprivileges tend to run out (in the realm of banking this is due to anincrease in branches, expenses, etc.), thus sparking demands for furtherdoses of inflation (ibid., p. 749).95 The expression “tragedy of the commons” came into use followingGarret Hardin’s article, “The Tragedy of the Commons,” Science (1968);reprinted on pp. 16–30 of Managing the Commons, Garret Hardin andJohn Baden, eds. (San Francisco: Freeman, 1970). However the processhad already been fully described twenty-eight years earlier by Ludwigvon Mises in his “Die Grenzen des Sondereigentums und das Problemder external costs und external economies,” section 6 of chapter 10 ofpart 4 of Nationalökonomie: Theorie des Handelns und Wirtschaftens(Geneva: Editions Union, 1940; Munich: Philosophia Verlag, 1980), pp.599–605.