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

682 Money, Bank Credit, and Economic Cyclescompletely free banking system credit expansion would becurbed sooner than in the current system, and it is quite anotherto claim that credit expansion brought about in a fractionalreservefree-banking system would never distort the productivestructure, since a state of supposed “monetary equilibrium”would always tend to return. In fact Mises himself veryclearly indicates that all credit expansion distorts the productivesystem. Hence Mises rejects the essence of the modern theory ofmonetary equilibrium. Indeed Mises affirms:The notion of “normal” credit expansion is absurd. Issuanceof additional fiduciary media, no matter what its quantity may be,always sets in motion those changes in the price structure thedescription of which is the task of the theory of the trade cycle. 120The chief failing of Selgin’s theory of “monetary equilibrium”is that it ignores the fact that the supply of fiduciary mediaTheory of Free Banking, pp. 62 and 164. Lawrence H. White attempts toplace a different interpretation on Mises’s position and presents Misesas the forerunner of modern fractional-reserve free banking defenders.See Lawrence H. White, “Mises on Free Banking and FractionalReserves,” in A Man of Principle: Essays in Honor of Hans F. Sennholz, JohnW. Robbins and Mark Spangler, eds. (Grove City, Penn.: Grove City CollegePress, 1992), pp. 517–33. Salerno, in agreement with Selgin, makesthe following response to White:To the extent that Mises advocated the freedom of banks toissue fiduciary media, he did so only because his analysis ledhim to the conclusion that this policy would result in a moneysupply strictly regulated according to the Currency principle.Mises’s desideratum was . . . to completely eliminate the distortiveinfluences of fiduciary media on monetary calculationand the dynamic market process. (Salerno, “Mises and HayekDehomogenized,” pp. 137ff. and p. 145)120 Mises, Human Action, p. 442, footnote 17; italics added. Mises adds:“Free banking . . . would . . . not hinder a slow credit expansion” (HumanAction, p. 443). Here Mises conveys an excessively optimistic impressionof fractional-reserve free banking, particularly in light of this earlier passagefrom Theory of Money and Credit (1924): “[I]t is clear that bankingfreedom per se cannot be said to make a return to gross inflationary policyimpossible.” Mises, Theory of Money and Credit, p. 436 (p. 408 in theGerman edition).