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

Central and Free Banking Theory 679the idea goes to one of White’s most noted students, George A.Selgin. Let us now critically examine Selgin’s theory of “monetaryequilibrium,” or in other words, his revised version ofsome of the Old Banking School doctrines.THE ERRONEOUS BASIS OF THE ANALYSIS: THE DEMANDFOR FIDUCIARY MEDIA, REGARDED AS AN EXOGENOUS VARIABLESelgin’s analysis rests on the notion that the demand formoney in the form of fiduciary media is a variable exogenousto the system, that this variable changes with the desires of economicagents, and that the main purpose of the free-bankingsystem is to reconcile the issuance of deposits and banknoteswith shifts in the demand for them. 115 Nevertheless such demandis not exogenous to the system, but endogenously determined by it.It is no coincidence that theorists of the Fractional-ReserveFree-Banking School begin their analysis by focusing on certainmore or less mysterious variations in the demand forfiduciary media, and that they neglect to explain the origin oretiology of these variations. 116 It is as if these theorists realizedI shall argue, this is just as acceptable as the view that the supplyof shoes should vary to meet the demand for them. (Horwitz,“Misreading the ‘Myth’,” p. 169)To be specific, White appears to defend the new version of the OldBanking School’s “needs of trade” doctrine on pp. 123–24 of his book,Free Banking in Britain. In contrast to the thesis of Horwitz, AmasaWalker indicates, in connection with fiduciary media:The supply does not satisfy the demand: it excites it. Like anunnatural stimulus taken into the human system, it creates anincreasing desire for more; and the more it is gratified, themore insatiable are its cravings. (Amasa Walker, The Science ofWealth: A Manual of Political Economy, 5th ed. [Boston: LittleBrown and Company, 1869], p. 156)115 “Free banking thus works against short-run monetary disequilibriumand its business cycle consequences.” Selgin and White, “In Defense ofFiduciary Media—or, We are Not Devo(lutionists), We are Misesians!”pp. 101–02.116 Joseph T. Salerno points out that for Mises, increases in the demandfor money do not pose any coordination problem whatsoever, as long asthe banking system does not attempt to adjust to them by creating new