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

Central and Free Banking Theory 675not be to permit the exploitation of the lucrative possibilitieswhich always arise from credit expansion. Instead free bankingshould be seen as an indirect route to the ideal free-banking system,one subject to legal principles, i.e., a 100-percent reserverequirement. All legal means available in a constitutional stateshould be applied at all times in the direct pursuit of this goal.4A CRITICAL LOOK AT THE MODERNFRACTIONAL-RESERVE FREE-BANKING SCHOOLThe last twenty years have seen a certain resurgence of theold economic Banking School doctrines. Defenders of theseviews claim that a fractional-reserve free-banking systemwould not only give rise to fewer distortions and economiccrises than central banking, but would actually tend to eliminatesuch problems. Given that these theorists base their reasoningon different variations of the Old Banking School arguments,some more sophisticated than others, we will groupthe theorists under the heading, “Neo-Banking School,” or“modern pro-Fractional-Reserve Free-Banking School.” Thisschool is composed of a curious alliance of scholars, 103 among103 As David Laidler accurately points out, recent interest in free bankingand the development of the Neo-Banking School originated withFriedrich A. Hayek’s book on the denationalization of money (F.A.Hayek, Denationalization of Money: The Argument Refined, 2nd ed. [London:Institute of Economic Affairs, 1978]). Prior to Hayek, BenjaminKlein offered a similar proposal in his article, “The Competitive Supplyof Money,” published in the Journal of Money, Credit and Banking 6(November 1974): 423–53. Laidler’s reference to the above two authorsappears in his brief but stimulating article on banking theory, “FreeBanking Theory,” found in The New Palgrave: A Dictionary of Money andFinance (London and New York: Macmillan Press, 1992), vol. 2, pp.196–97. According to Oskari Juurikkala, the current debate among freebankingtheorists (pro-100-percent reserve requirement versus pro-fractionalreserve) is strictly parallel to the nineteenth century French debatebetween Victor Modeste (and Henry Cernuschi) and J. Gustave Courcelle-Seneuil.See his article, “The 1866 False-Money Debate in theJournal des Economistes: Déjà Vu for Austrians?”