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

688 Money, Bank Credit, and Economic CyclesTHE THEORY OF “MONETARY EQUILIBRIUM” IN FREE BANKINGRESTS ON AN EXCLUSIVELY MACROECONOMIC ANALYSISWe must point out that the analysis of modern free-bankingtheorists ignores the microeconomic effects which arise fromincreases and decreases in the supply of and demand for fiduciarymedia instigated by the banking industry. In other words,even if we admit for the sake of argument that the origin of allevil lies, as these theorists suppose, in unexpected changes ineconomic agents’ demand for fiduciary media, it is clear thatthe supply of fiduciary media which the banking system supposedlygenerates to adjust to changes in the demand for themdoes not instantaneously reach precisely those economicagents whose valuation of the possession of new fiduciarymedia has altered. Instead this supply flows into the market atcertain specific points and in a particular manner: in the formof loans granted via a reduction in the interest rate and initiallyreceived by individual businessmen and investors who tend touse them to initiate new, more capital-intensive investmentprojects which distort the productive structure.not led by outside circumstances to abandon it. Only later didI become convinced that it was useless to look to an outsidestimulus for the change in the conduct of the banks. . . . Wecan readily understand that the banks issuing fiduciarymedia, in order to improve their chances for profit, may beready to expand the volume of credit granted and the numberof notes issued. What calls for special explanation is whyattempts are made again and again to improve general economicconditions by the expansion of circulation credit inspite of the spectacular failure of such efforts in the past. Theanswer must run as follows: According to the prevailing ideologyof businessman and economist-politician, the reductionof the interest rate is considered an essential goal of economicpolicy. Moreover, the expansion of circulation credit isassumed to be the appropriate means to achieve this goal.(Mises, On the Manipulation of Money and Credit, pp. 135–36)For the above reasons I do not consider entirely correct the position ofLudwig van den Hauwe, “Credit Expansion, the Prisoner’s Dilemmaand Free Banking as Mechanism Design,” Procesos de Mercado 5, no. 2(Autumn 2008): 133–74.131 “Crises have reappeared every few years since banks . . . began toplay an important role in the economic life of people.” Ibid., p. 134.