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

Central and Free Banking Theory 701THE PROBLEM WITH HISTORICAL ILLUSTRATIONS OFFREE-BANKING SYSTEMSNeo-banking authors devote strong efforts to historicalstudies which they intend to support the thesis that a freebankingsystem would protect economies from cycles of boomand depression, owing to the “monetary equilibrium” mechanism.Nevertheless the empirical studies produced thus farhave not focused on whether free-banking systems have preventedcredit expansion, artificial booms and economic recessions.Instead they have centered on whether bank crises andruns have been more or less frequent and severe in this type ofsystem than in a central-banking system (which is obviouslyquite a different issue). 145tendency toward the establishment of a central bank as a lender of lastresort designed to support bankers and create the liquidity necessary toinsure citizens the recovery of their deposits at any time. As for the supposed“advantage” of receiving interest on deposits and “free” cashierand bookkeeping services, there is no telling whether, in net terms, theinterest economic agents would earn on funds truly saved and lent in asystem with a 100-percent reserve requirement, less the cost of the correspondingdeposit, cashier and bookkeeping services, would be equalto, higher than or lower than the real interest they currently receive ontheir demand checking accounts (minus the decline which chronicallyaffects the purchasing power of money in the current banking system).145 To date, theorists have carefully examined around sixty free-bankingsystems from the past. The conclusion they have generally drawn follows:Bank failure rates were lower in systems free of restrictions oncapital, branching and diversification (e.g., Scotland andCanada) than in systems restricted in these respects (Englandand the United States).However this matter is irrelevant from the standpoint of our thesis,since the above studies do not specify whether cycles of expansion andeconomic recession were set in motion. See The Experience of Free Banking,Kevin Dowd, ed., pp. 39–46. See also Kurt Schuler and Lawrence H.White, “Free Banking History,” The New Palgrave Dictionary of Money andFinance, Peter Newman, Murray Milgate and John Eatwell, eds. (London:Macmillan, 1992), vol. 2, pp. 198–200. The above excerpt appearson p. 108 of this last article.