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

Central and Free Banking Theory 667the cost of his irresponsible act is shared by all other economicagents. It is for this reason that bankers face the almost irresistibletemptation to be the first to initiate a policy of expansion,particularly if they expect all other banks to follow suitto one degree or another, which often occurs. 96The above example differs only slightly from Hardin’sclassic illustration of the “tragedy of the commons,” in whichhe points to the effects an inadequate recognition of propertyrights may exert on the environment. Unlike in Hardin’sexample, in fractional-reserve free banking a spontaneousmechanism (interbank clearing houses) tends to limit the possibilitythat isolated expansionary schemes will reach a successfulconclusion. Table VIII-2 outlines the dilemma banksencounter in such a system.TABLE VIII-296 Selgin and White have criticized our application of the “tragedy of thecommons” theory to fractional-reserve free banking. They claim thatwhat occurs in this sector is a pecuniary externality (i.e., one derivedfrom the price system), which has nothing to do with the technologicalexternality on which the “tragedy of the commons” rests. See George A.Selgin and Lawrence H. White “In Defense of Fiduciary Media, or Weare Not (Devo)lutionists, We are Misesians!” Review of Austrian Economics9, no. 2 (1996): 92–93, footnote 12. Nevertheless Selgin and White donot seem to fully grasp that the issuance of fiduciary media stems fromthe violation of traditional property rights in connection with the monetarybank-deposit contract, and that hence fiduciary media are not aspontaneous phenomenon of a legally based free-market process.Hoppe, Hülsmann, and Block, for their part, have come to our defensewith the following assertion: