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

702 Money, Bank Credit, and Economic CyclesIn fact George A. Selgin looks at the occurrence of bankruns in different historical free-banking systems versus certainsystems controlled by a central bank and reaches the conclusionthat bank crises were more numerous and acute in thesecond case. 146 Moreover the main thesis of the main neobankingbook on free banking in Scotland consists entirely ofthe argument that the Scottish banking system, which was“freer” than the English one, was more “stable” and subject tofewer financial disturbances. 147However, as Murray N. Rothbard has indicated, the factthat, in relative terms, fewer banks failed in the Scottish freebankingsystem than in the English system does not necessarilymean the former was superior. 148 Indeed bank failureshave been practically eliminated from current central-bankingsystems, and this does not make such systems better than afree-banking system subject to legal principles. It actuallymakes them worse. For bank failures in no way indicate that asystem functions poorly, but rather that a healthy, spontaneousreversion process has begun to operate in response tofractional-reserve banking, which is a legal privilege and anattack on the market. Therefore whenever a fractional-reservefree-banking system is not regularly accompanied by bankfailures and suspensions of payments, we must suspect theexistence of institutional factors which shield banks from the normalconsequences of fractional-reserve banking and fulfill a role similarto the one the central bank currently fulfills as lender of lastresort. In the case of Scotland, banks had so encouraged theuse of their notes in economic transactions that practically noone demanded payment of them in gold, and those whooccasionally requested specie at the window of their banksmet with general disapproval and enormous pressure from146 George A. Selgin, “Are Banking Crises a Free-Market Phenomenon?”a manuscript presented at the regional meeting of the Mont Pèlerin Society,Rio de Janeiro, September 5–8, 1993, pp. 26–27.147 White, Free Banking in Britain.148 Rothbard, “The Myth of Free Banking in Scotland,” Review of AustrianEconomics 2 (1988): 229–45, esp. p. 232.