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

700 Money, Bank Credit, and Economic Cyclessacrifice in consumption has not taken place, and investmentis financed by created credit, then the productive structure isinvariably distorted, even if the newly-created fiduciarymedia correspond to a previous rise in the demand for them.Hence Selgin is obliged to redefine the concepts of saving andcredit creation. He claims saving occurs ipso facto the momentnew fiduciary media are created, provided their initial holdercould spend them on consumer goods and does not. Selginalso maintains that credit expansion does not generate cycles ifit tends to match a prior increase in the demand for fiduciarymedia. In short these arguments resemble those Keynesexpresses in his General Theory, arguments refuted long ago, aswe saw in chapter 7.The creation of fiduciary media also entails an increase inthe money supply and a consequent decrease in the purchasingpower of money. In this way banks collectively and almostimperceptibly “expropriate” the value of citizens’ monetaryunits. It certainly smacks of a bad joke to declare that the economicagents who suffer such expropriation are actually (voluntarily?)“saving.” It is not surprising that these doctrineshave been defended by authors like Keynes, Tobin, Pointdexterand, in general, all who have justified inflationism, creditexpansion and the “euthanasia of the rentier” for the sake ofaggressive economic policies geared to insure an “adequate”level of “aggregate demand.” What is surprising, however, isthat authors like Selgin and Horwitz, who belong (or at leastbelonged) to the Austrian School and thus should be moreaware of the dangers involved, have had no alternative but toresort to this sort of argument in order to justify their “fractional-reservefree-banking” system. 144144 As an additional advantage of the system he proposes, Selgin mentionsthat economic agents who maintain cash balances in the form offiduciary media created in a free-banking system can obtain a financialyield on their money and use a series of banking facilities (payment,bookkeeping, cashier, etc.) “free of charge.” However Selgin fails tomention certain costs of fractional-reserve free banking, such as artificialbooms, malinvestment of resources, and economic crises. He also fails totouch on what we definitely consider the highest cost: the harmful effectsof the violation of legal principles in a free-banking system give rise to a