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

668 Money, Bank Credit, and Economic CyclesThis table reflects the existence of two banks, Bank A andBank B, both of which have two options: either to refrain fromexpanding credit or to adopt a policy of credit expansion. Ifboth banks simultaneously initiate credit expansion (assumingthere are no other banks in the industry), the ability toissue new monetary units and fiduciary media will yield thesame large profits to both. If either expands credit alone, itsviability and solvency will be endangered by interbank clearingmechanisms, which will rapidly shift its reserves to theother bank if the first fails to suspend its credit expansion policyin time. Finally it is also possible that neither of the banksmay expand and both may maintain a prudent policy of loanconcession. In this case the survival of both is guaranteed,though their profits will be quite modest. It is clear that given thechoices above, the two banks will face a strong temptation to arrive atan agreement and, to avoid the adverse consequences of acting independently,initiate a joint policy of credit expansion which will protectboth from insolvency and guarantee handsome profits. 97In lumping money and money substitutes together under thejoint title of “money” as if they were somehow the samething, Selgin and White fail to grasp that the issue of fiduciarymedia—an increase of property titles—is not the samething as a larger supply of property and that relative pricechanges effected through the issue of fiduciary media are anentirely different “externality” matter than price changeseffected through an increase in the supply of property. Withthis the fundamental distinction between property and aproperty title in mind, Huerta de Soto’s analogy betweenfractional reserve banking and the tragedy of the commonsmakes perfect sense. (Hans-Hermann Hoppe, Jörg GuidoHülsmann and Walter Block, “Against Fiduciary Media,” TheQuarterly Journal of Austrian Economics 1, no. 1 (1998): 23, footnote6)Furthermore Mises emphasizes that the chief economic effect of negativeexternal costs is to complicate economic calculation and discoordinatesociety, phenomena which clearly take place in the case of creditexpansion in fractional-reserve banking. See Mises, Human Action, pp.655ff.; and Philipp Bagus, “La tragedia de los bienes comunales y laescuela austriaca: Hardin, Hoppe, Huerta de Soto, y Mises,” Procesos deMercado 1, no. 2 (2004): 125–29.97 Table VIII-2 does not include any “weights” or values and is typicallyused to illustrate both cooperative games and “prisoner’s dilemmas”