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

Central and Free Banking Theory 703their bankers, who accused them of “disloyalty” and threatenedto make it difficult for them to obtain loans in the future.Furthermore, as Professor Sidney G. Checkland has shown, 149the Scottish fractional-reserve free-banking system still wentthrough frequent, successive stages of credit expansion andcontraction, which gave rise to economic cycles of boom andrecession in 1770, 1772, 1778, 1793, 1797, 1802–1803, 1809–1810,1810–1811, 1818–1819, 1825–1826, 1836–1837, 1839, and1845–1847. In other words, even though in relative termsfewer bank runs occurred in Scotland than in England, thesuccessive stages of boom and depression were equallysevere, and despite its highly praised free-banking system,Scotland was not free from credit expansion, artificial boomsand the subsequent stages of serious economic recession. 150The nineteenth-century Chilean financial system providesanother historical illustration of the inadequacy of fractionalreservefree-banking systems to prevent artificial expansionand economic recessions. In fact during the first half of thenineteenth century, Chile had no central bank and implementeda 100-percent reserve requirement in banking. For severaldecades its citizens firmly resisted attempts to introduce afractional-reserve banking system, and during those years theyenjoyed great economic and financial stability. The situationbegan to change in 1853, when the Chilean government hiredJean-Gustav Courcelle-Seneuil (1813–1892), one of the mostprominent French fractional-reserve free-banking theorists, asprofessor of economics at the University of Santiago de Chile.149 Sidney G. Checkland, Scottish Banking: A History, 1695–1973 (Glasgow:Collins, 1975). White himself recognizes in his book that Checkland’sis the definitive work on the history of the Scottish banking system.150 Though much work remains to be done, historical studies on fractional-reservefree-banking systems with very few (if any) legal restrictionsand no central bank appear to confirm that these systems were capableof triggering significant credit expansion and provoking economicrecessions. This is what took place, for instance, in Italian and Spanishfinancial markets in the fourteenth and sixteenth centuries (see chapter2, section 3), as Carlo M. Cipolla and others have revealed, as well as inScotland and Chile, as we indicate in the text.