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

Central and Free Banking Theory 709repayment of their deposits at any time, no one can guaranteethey will be repaid in monetary units of undiminished purchasingpower. Third, all other borrowers and economicagents are harmed, since the creation of fiduciary credit andits injection into the economic system jeopardizes the entirecredit system and distorts the productive structure, thusincreasing the risk that entrepreneurs will launch projectswhich will fail in the process of their completion and causeuntold human suffering when credit expansion ushers in thestage of economic recession. 159In a free-banking system, when the purchasing power ofmoney declines in relation to the value money would havewere credit not expanded in a fractional-reserve environment,participants (depositors and, especially, bankers) act to thedetriment of third parties. The very definition of moneyreveals that any manipulation of it, society’s universalmedium of exchange, will exert harmful effects on almost allthird-party participants throughout the economic system.Therefore it does not matter whether or not depositors,bankers, and borrowers voluntarily reach specific agreementsif, through fractional-reserve banking, such agreements influencemoney and harm the public in general (third parties).Such damage renders the contract null and void, due to its159 The multidisciplinary nature inherent in the critical analysis of thefractional-reserve banking system and the resulting importance of bothlegal and economic considerations in this analysis not only comprise thefocal point of this book; Walter Block also highlights them in his article,“Fractional Reserve Banking: An Interdisciplinary Perspective,” publishedas chapter 3 of Man, Economy, and Liberty: Essays in Honor of MurrayN. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds.(Auburn, Ala.: Ludwig von Mises Institute, 1988), pp. 24–32. Blockpoints out the curious fact that no theorist from the modern, Fractional-Reserve Free-Banking School has built a critical, systematic case againstthe proposal of a banking system with a 100-percent reserve requirement.In fact, except for a few comments from Horwitz, neo-bankingtheorists have yet to even attempt to show that a banking system with a100-percent reserve requirement would fail to guarantee “monetaryequilibrium” and an absence of economic cycles. See Horwitz, “Keynes’Special Theory,” pp. 431–32, footnote 18.