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

686 Money, Bank Credit, and Economic CyclesGranted, the process itself will tend to reveal and eliminatethe errors committed, but only following a period of varyinglength, and damage to the real productive structure will notbe avoided. If we add that, as we saw in the last section, thesupply of fiduciary media tends to create its own demand, wesee it is highly unlikely that a fractional-reserve free-bankingsystem (or any other market) could reach the “monetary equilibrium”that its theorists so desire. For in the best of cases, privatebankers will attempt through a process of trial and error toadjust their supply of fiduciary media to the demand for them,which is unknown to bankers and tends to vary as a consequenceof the very issuance of fiduciary media. Hence scholarsmay debate whether or not the entrepreneurial coordinationprocess will bring the coveted state of “monetary equilibrium”within bankers’ reach, but scholars cannot deny that throughoutthis process innumerable entrepreneurial errors will becommitted in the form of the unjustified issuance of fiduciarymedia, and that these errors will inevitably tend to affect theproductive structure by provoking economic crises and recessions,just as the Austrian theory of economic cycles explains. 124Second, a large or small group of bankers could also collectivelyorchestrate the expansion of fiduciary media ordecide to merge in order to share and better “manage” theirreserves, thus increasing their capacity to expand credit andimprove profits. 125 Unless fractional-reserve free-bankingtheorists wish to prohibit this type of entrepreneurial strategy(which we doubt), it will obviously result in credit expansionand consequent economic recessions. It can be argued that inconcertexpansion will tend to correct itself, since, as Selginmaintains, the total increase in interbank clearings will raisethe variance in the clearing of debits and credits. 126 However,aside from Selgin’s assumption that the total volume of metallicreserves in the banking system remains constant, anddespite the doubts of many authors regarding the effectiveness124 See Jörg Guido Hülsmann, “Free Banking and Free Bankers,” Reviewof Austrian Economics 9, no. 1 (1996): 3–53, esp. pp. 40–41.125 Remember our analysis contained in pages 664–71. See Laidler, “FreeBanking Theory,” p. 197.126 Selgin, The Theory of Free Banking, p. 82.