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

680 Money, Bank Credit, and Economic Cyclesthat, on the side of the money supply, the Austrians havedemonstrated that credit expansion seriously distorts theeconomy, a fact which in any case seems to warrant a rigidmonetary system 117 capable of preventing the monetaryexpansions and contractions typical of any fractional-reservebanking system. Therefore on the side of supply, theoreticalarguments appear to support the establishment of a relativelyinelastic monetary system, such as a pure gold standard witha 100-percent reserve requirement for banknotes anddeposits. 118 Hence if defenders of the Neo-Banking Schoolloans. Even a rise in saving (that is, a fall in consumption) expressedsolely in increased cash balances (hoarding), and not in loans linked tospending on investment goods, would lead to the effective saving ofconsumer goods and services in the community and to a process bywhich the productive structure would become longer and more capitalintensive.In this case the rise in cash balances would simply boost thepurchasing power of money by pushing down the nominal prices of theconsumer goods and services of the different factors of production.Nonetheless, in relative terms, the price disparities characteristic of aperiod of rising saving and increasing capital intensity in the productivestructure would arise among the different stages of factors of production.See Joseph T. Salerno, “Mises and Hayek Dehomogenized,”printed in Review of Austrian Economics 6, no. 2 (1993): 113–46, esp. pp.144ff. See also Mises, Human Action, pp. 520–21. In the same article,Salerno strongly criticizes White for maintaining that Mises was theforerunner of the modern free-banking theorists and for not realizingthat Mises always challenged the essential premises of the BankingSchool and only defended free banking as a way to reach the final goalof a banking system with a 100-percent reserve requirement. See pp.137ff. in the above article. See also upcoming footnote 119.117 Let us remember that Hayek’s objective in Prices and Production waspreciselyto demonstrate that the cry for an “elastic” currency whichexpands or contracts with every fluctuation of “demand” isbased on a serious error of reasoning. (See p. xiii of Hayek’spreface to the first edition of Prices and Production)118 Mark Skousen states that a system based on a pure gold standardwith a 100-percent reserve requirement in banking would be more elasticthan the system Hayek proposes and would not have the defect ofconforming to the “needs of trade”: decreases in prices would stimulatethe production of gold, thereby generating a moderate expansion of themoney supply without producing cyclical effects. Skousen concludes: