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

Central and Free Banking Theory 671Fractional-reserve banking distorts the productive structureand provokes widespread, intertemporal discoordination inthe economy, a situation bound to spontaneously reverse inthe form of an economic crisis and recession. Although in afractional-reserve free-banking system independent reversionprocesses tend to curb abuses sooner than in a system controlledand directed by a central bank, the most harmful effect offractional-reserve free banking is that it provides banks with animmensely powerful incentive to expand loans jointly and, particularly,to urge authorities to create a central bank aimed at offeringsupport in times of economic trouble and organizing andorchestrating widespread, collective credit expansion.CONCLUSION: THE FAILURE OF BANKING LEGISLATIONSociety’s market process is made possible by a set of customaryrules of which it is also the source. These rules constitutethe behavioral patterns embodied in criminal law and privatecontract law. No one has deliberately formulated them.Instead such rules are evolutionary institutions which emergefrom practical information contributed by a huge number ofactors over a very prolonged period of time. Substantive ormaterial law, in this sense, comprises a series of general,abstract rules or laws. They are general because they applyequally to all people, and they are abstract because they establishonly a broad scope of action for individuals and do notpoint to any concrete result of the social process. In contrast tothis substantive conception of law, we find legislation, understoodas a set of coercive, statutory, and ad hoc orders or commandswhich are the materialization of the illegitimate privilegesand the systematic, institutional aggression with whichthe government attempts to dominate the processes of humaninteraction. 99 This concept of legislation implies the abandonmentof the traditional notion of the law (explained above),and the replacement of it with “spurious law” composed of aconglomeration of administrative orders, regulations and99 Hayek, The Constitution of Liberty and Law, Legislation and Liberty. See alsoHuerta de Soto, Socialism, Economic Calculation and Entrepreneurship,chap. 3.