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

Central and Free Banking Theory 673Each time a new crisis hits, a complete set of new laws oramendments to prior ones is swiftly enacted under thenaive assumption that the former laws were insufficient andthat the new, more detailed and all-encompassing ones willbetter avoid future crises. This is how the government andthe central bank excuse their unfortunate inability to avertcrises, which nevertheless arise again and again, and thenew regulations last only until the next bank crisis and economicrecession. 100Therefore we can conclude that banking legislation is condemnedto failure and will continue to be so unless the presentform is thoroughly abolished and replaced by a few simplearticles to be included in the commercial and penal codes.These articles would establish the regulation of the monetarybank-deposit contract according to traditional legal principles(a 100-percent reserve requirement) and would prohibit allcontracts which mask fractional-reserve banking. In short, in100 See p. 2 of our student Elena Sousmatzian Ventura’s article, “¿Puedela intervención gubernamental evitar las crisis bancarias?” Ms. Sousmatzianquotes the following description (offered by Tomás-Ramón Fernández)of the crisis-legislation cycle:Banking legislation has always developed in response tocrises. When crises have hit, existing legislation has alwaysbeen found inadequate and devoid of the necessary answersand solutions. Thus it has always been necessary to come upwith hasty emergency solutions which, despite the context oftheir “invention,” at the end of each crisis have been incorporatedinto a new general legal framework, which has lastedonly until the following shock, when a similar cycle hasbegun. (Tomás-Ramón Fernández, Comentarios a la ley de disciplinade intervención de las entidades de crédito [Madrid: Serie deEstudios de la Fundación Fondo para la InvestigaciónEconómica y Social, 1989], p. 9)Elena Sousmatzian expresses the problem in this way: if bank crises arepreventable, government intervention has proven unequal to the task ofpreventing them; and if crises are inevitable, government interventionin this area is superfluous. Both positions have truth to them, since fractional-reservebanking makes crises inescapable, regardless of thebanking legislation which governments insist on drafting and whichoften does more to further aggravate cyclical problems than it does tolessen them.