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

Central and Free Banking Theory 687of Selgin’s mechanism, 127 even if we allow for the sake ofargument that Selgin is correct, it can still be argued that theadjustment will never be perfect nor immediate, and thereforein-concert expansion and mergers may provoke significantincreases in the supply of fiduciary media, thus triggering theprocesses which set economic cycles in motion.Third and last, with every increase in the overall stock ofspecie (gold) banks keep as a “prudent” reserve, a fractionalreservefree-banking system would stimulate growth in theissuance of fiduciary media which does not correspond toprior rises in demand. If we remember that the world stock ofgold has been mounting at an annual rate of 1 to 5 percent 128due to the increased world production of gold, it is clear thatthis factor alone will permit private bankers to issue fiduciarymedia at a rate of 1 to 5 percent per year, regardless of thedemand for them. (Such creation of money will produce anexpansion followed by a recession.) 129In conclusion, significant (fiduciary) inflationary processes130 and severe economic recessions 131 may occur in anyfractional-reserve free-banking system.127 See, for example, Schwartz, “The Theory of Free Banking,” p. 3; andspecially Philipp Bagus and David Howden “Fractional Reserve FreeBanking: Some Quibbles,” Quarterly Journal of Austrian Economics 13, no.4 (2010): 29–55; and “Unanswered Quibbles: George Selgin Gets itWrong with Fractional Reserve Free Banking,” Procesos de Mercado 8, no.2 (2011): 83–111.128 Skousen, The Structure of Production, chap. 8, pp. 269 and 359.129 We cannot rule out even greater credit expansion in the event of shocksin the supply of gold, though Selgin tends to play down the importanceof this possibility. Selgin, The Theory of Free Banking, pp. 129–33.130 Let us remember that for Mises (see footnote 120 above): “Bankingfreedom per se cannot be said to make a return to gross inflationary policyimpossible,” especially if an inflationary ideology prevails amongeconomic agents:Many authors believe that the instigation of the banks’ behaviorcomes from outside, that certain events induce them topump more fiduciary media into circulation and that theywould behave differently if these circumstances failed toappear. I was also inclined to this view in the first edition ofmy book on monetary theory. I could not understand why thebanks didn’t learn from experience. I thought they would certainlypersist in a policy of caution and restraint, if they were