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

670 Money, Bank Credit, and Economic Cyclesdesigned to orchestrate and organize it. In this way, the “uncooperative”behavior of a significant number of relatively moreprudent bankers is prevented from endangering the solvencyof the rest (those who are more “cheerful” in granting loans).Therefore our analysis enables us to conclude the following:(1) that the interbank clearing mechanism does not serveto limit credit expansion in a fractional-reserve free-bankingsystem if most banks decide to simultaneously expand theirloans in the absence of a prior rise in voluntary saving; (2) thatthe fractional-reserve banking system itself prompts bankersto initiate their expansionary policies in a combined, coordinatedmanner; and (3) that bankers in the system have a powerfulincentive to demand and obtain the establishment of acentral bank to institutionalize and orchestrate credit expansionfor all banks, and to guarantee the creation of the necessaryliquidity in the “troublesome” periods which, as bankersknow from experience, inevitably reappear. 98The privilege which allows banks to use a significantportion of the money placed with them on demand deposit,i.e., to operate with a fractional reserve, cyclically can resultin a dramatic discoordination of the economy. A similar effectappears when privileges are granted to other social groupsin other areas (unions in the labor market, for example).98 Precisely for the reasons given I cannot agree with my friend PascalSalin, who concludes that “the problem is [central bank] monetarymonopoly, not fractional reserve.” See Pascal Salin, “In Defense of FractionalMonetary Reserves.” Even the most prominent defenders of fractional-reservefree banking have recognized that the interbank clearingsystem which would emerge in a free-banking environment would beincapable of checking a widespread expansion of loans. For example,see George Selgin’s article, “Free Banking and Monetary Control,”printed in Economic Journal 104, no. 427 (November 1994): 1449–59, esp.p. 1455. Selgin overlooks the fact that the fractional-reserve banking systemhe supports would create an irresistible trend not only towardmergers, associations and agreements, but also (and even more importantly)toward the establishment of a central bank designed to orchestratejoint credit expansion without compromising the solvency of individualbanks, and to guarantee necessary liquidity as a lender of lastresort with the power to assist any bank in times of financial difficulties.