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

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Central and Free Banking Theory 677Milton Friedman, 111 though he cannot be considered a memberof this new school, has been gradually leaning toward it, especiallyfollowing his failure to convince central bankers thatthey should put his famous monetary rule into practice.Modern fractional-reserve free-banking theorists havedeveloped an economic theory of “monetary equilibrium.”They base their theory on certain typical elements of the monetaristand Keynesian analysis 112 and intend it to demonstratethat a fractional-reserve free-banking system would simplyadjust the volume of fiduciary media created (banknotes anddeposits) to public demand for them. In this way they arguethat fractional-reserve free banking would not only preserve“monetary equilibrium” better than other, alternative systemsbut would also most effectively adjust the supply of money tothe demand for it.109 Leland B. Yeager and Robert Greenfield, “A Laissez-Faire Approachto Monetary Stability,” Journal of Money, Credit and Banking 15, no. 3(August 1983): 302–15, reprinted as chapter 11 of volume 3 of Free Banking,Lawrence H. White, ed., pp. 180–95; Leland B. Yeager and RobertGreenfield, “Competitive Payments Systems: Comment,” American EconomicReview 76, no. 4 (September 1986): 848–49. And finally Yeager’sbook, The Fluttering Veil: Essays on Monetary Disequilibrium.110 Richard Timberlake, “The Central Banking Role of ClearinghouseAssociations,” Journal of Money, Credit and Banking 16 (February 1984):1–15; “Private Production of Scrip-Money in the Isolated Community,”Journal of Money, Credit and Banking 19, no. 4 (October 1987): 437–47;“The Government’s Licence to Create Money,” The Cato Journal: AnInterdisciplinary Journal of Public Policy Analysis 9, no. 2 (Fall, 1989):302–21.111 Milton Friedman and Anna J. Schwartz, “Has Government Any Rolein Money?” Journal of Monetary Economics 17 (1986): 37–72, reprinted aschapter 26 of the book, The Essence of Friedman, Kurt R. Leube, ed. (StanfordUniversity, Calif.: Hoover Institution Press, 1986), pp. 499–525.112 Thus Selgin himself states:Despite . . . important differences between Keynesian analysisand the views of other monetary-equilibrium theorists,many Keynesians might accept the prescription for monetaryequilibrium. ( Selgin, The Theory of Free Banking, p. 56; see alsop. 59)
678 Money, Bank Credit, and Economic CyclesIn a nutshell, this argument centers around the hypotheticalresults of an increase in economic agents’ demand for fiduciarymedia, assuming reserves of specie in the banking systemremain constant. In that event, theorists reason, the paceat which fiduciary media are exchanged for bank reserveswould slacken. Reserves would increase and bankers, awareof this rise and eager to obtain larger profits, would expandcredit and issue more banknotes and deposits, and the growthin fiduciary media would tend to match the prior increase indemand. The opposite would occur should the demand forfiduciary media decrease: Economic agents would withdrawgreater quantities of reserves in order to rid themselves offiduciary media. Banks would then see their solvency endangeredand be obliged to tighten credit and issue fewer banknotesand deposits. In this way a decrease in the supply offiduciary media would follow the prior decrease in thedemand for them. 113The theory of “monetary equilibrium” obviously echoesFullarton’s law of reflux and, especially, the Old BankingSchool arguments concerning the “needs of trade.” Accordingto these arguments, private banks’ creation of fiduciary mediais not detrimental if it corresponds to an increase in the“needs” of businessmen. These arguments are repeated andcrystallized in the “new” theory of “monetary equilibrium,”which states that private banks’ creation of fiduciary media inthe form of notes and deposits does not generate economiccycles if it follows a rise in public demand for such instruments.Although Lawrence H. White does develop an embryonic versionof this reformed “needs of trade” doctrine in his book onfree banking in Scotland, 114 credit for theoretically formulating113 The detailed analysis appears, among other places, in Selgin’s book,The Theory of Free Banking, chaps. 4, 5 and 6, esp. p. 34 and pp. 64–69.114 Stephen Horwitz maintains that Lawrence Whiteexplicitly rejects the real-bills doctrine and endorses a differentversion of the “needs of trade” idea. For him the “needsof trade” means the demand to hold bank notes. On this interpretation,the doctrine states that the supply of bank notesshould vary in accordance with the demand to hold notes. As
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MONEY,BANK CREDIT,ANDECONOMIC CYCLE
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CONTENTSPREFACE TO THE THIRD ENGLIS
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xiiMoney, Bank Credit, and Economic
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xivMoney, Bank Credit, and Economic
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xviMoney, Bank Credit, and Economic
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xviiiMoney, Bank Credit, and Econom
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PREFACE TO THESECOND ENGLISH EDITIO
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Preface to the Second English Editi
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PREFACE TOTHE THIRDSPANISH EDITIONI
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Preface to the Third Spanish Editio
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xliiMoney, Bank Credit, and Economi
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INTRODUCTIONThe economic analysis o
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Introductionxlviiand foreign exchan
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IntroductionxlixThis book comprises
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Introductionrecurrent phenomenon. I
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Introductionand Professors Hans-Her
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4THE CREDITEXPANSION PROCESSThis ch
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6ADDITIONALCONSIDERATIONSON THE THE
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7A CRITIQUE OFMONETARIST ANDKEYNESI
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A Critique of Monetarist and Keynes
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8CENTRAL AND FREEBANKING THEORYThis
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A Proposal for Banking Reform:The T
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BIBLIOGRAPHYAbrams, M.A., Money in
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Bibliography 815Bajo Fernández, M.
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Bibliography 817Borch, K.H., Econom
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Bibliography 819Coronel de Palma, L
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Bibliography 821N. Durlauf and Lawr
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Bibliography 823Galiani, F., Della
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Bibliography 825Graham, F.D., “Pa
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Bibliography 827——, Prices and
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Bibliography 829translation by N. K
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Bibliography 831——, “Keynes
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Bibliography 833Russian edition by
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Bibliography 835Keeler, J., “Empi
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Bibliography 837——, “On Crisi
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Bibliography 839——, “Professo
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Bibliography 841Miller, H.E., Banki
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Bibliography 843Neira, Alonzo, M.A.
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Bibliography 845Raguet, C., “Repo
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Bibliography 847——, “The Myth
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Bibliography 849——, “Banking
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Bibliography 851M.C. Marcuzzo (Chel
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Bibliography 853——, “A Critiq
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Bibliography 855Walker, A., The Sci
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INDEX OF SUBJECTSAccelerator princi
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Index of Subjects 859Banking reform
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Index of Subjects 861objection to t
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Index of Subjects 863Goal, concept
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Index of Subjects 865See also Fract
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Index of Subjects 867Plan, definiti
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Index of Subjects 869Tragedy of the
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