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

Central and Free Banking Theory 685THE POSSIBILITY THAT A FRACTIONAL-RESERVE FREE-BANKINGSYSTEM MAY UNILATERALLY INITIATE CREDIT EXPANSIONVarious circumstances make it possible for a fractionalreservefree-banking system to initiate credit expansion in theabsence of a corresponding, prior increase in the demand forfiduciary media.First, we must point out that the monetary equilibriumanalysis of modern free-banking theorists contains many ofthe same limitations as the traditional neoclassical analysis,which, both in a micro- and macroeconomic context, merelydeals with the final state of social processes (monetary equilibrium),a state to which the rational, maximizing behavior ofeconomic agents (private bankers) supposedly leads. In contrast,the economic analysis of the Austrian School centers ondynamic entrepreneurial processes, rather than on equilibrium.Each entrepreneurial act coordinates and establishes atendency toward equilibrium, which, nevertheless, is neverreached, because during the process itself circumstanceschange and entrepreneurs create new information. Thus, fromthis dynamic point of view, we cannot accept a static modelwhich, like that of monetary equilibrium, presupposes thatimmediate, perfect adjustments between the demand for andthe supply of fiduciary media take place.In real life, each banker, according to his insight and entrepreneurialcreativity, subjectively interprets the informationhe receives from the outside world, both in terms of his levelof optimism in evaluating the course of economic events, andin terms of the volume of reserves he considers “prudent”with a view to maintaining his solvency. Hence each banker,in an environment of uncertainty, decides each day what volumeof fiduciary media he will issue. In the above entrepreneurialprocess, bankers will clearly commit many errorswhich will manifest themselves in the unilateral issuance offiduciary media and will distort the productive structure.rise in the demand for money are exceptional, like wars and natural disasters.Seasonal variations are comparatively less important and a freebankingsystem with a 100-percent reserve requirement could counteractthem with a seasonal transfer of gold and slight price modifications.