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

710 Money, Bank Credit, and Economic Cyclesdisruption of the public order. 160 Economically speaking, thequalitative effects of credit expansion are identical to those ofthe criminal act of counterfeiting banknotes and coins, anoffense covered, for instance, by articles 386–389 of the newSpanish Penal Code. 161 Both acts entail the creation of money,the redistribution of income in favor of a few citizens and tothe detriment of all others, and the distortion of the productivestructure. Nonetheless, from a quantitative standpoint,only credit expansion can increase the money supply at a fastenough pace and on a large enough scale to feed an artificialboom and provoke a recession. In comparison with the creditexpansion of fractional-reserve banking and the manipulationof money by governments and central banks, the criminal actof counterfeiting currency is child’s play with practicallyimperceptible social consequences.The above legal considerations have not failed to influenceWhite, Selgin, and other modern free-banking theorists, whohave proposed, as a last line of defense to guarantee the stabilityof their system, that “free” banks establish a “safeguard”clause on their notes and deposits, a clause to inform customersthat the bank may decide at any moment to suspend orpostpone the return of deposits or the payment of notes inspecie. 162 Clearly the introduction of this clause would mean160 Our position on this point is even more radical than the one AlbertoBenegas Lynch takes in his book, Poder y razón razonable (Buenos Airesand Barcelona: Librería “El Ateneo” Editorial, 1992), pp. 313–14.161 The following shall be punishable by a prison term of eight totwelve years and a fine of up to ten times the face value of thecurrency: 1. The creation of counterfeit currency. (Article 386of the new Spanish Penal Code)It is important to note that credit expansion, like the counterfeiting ofmoney, inflicts particularly diffuse damage on society, and therefore itwould be exceedingly difficult, if not impossible, to fight this crimebased on each injured party’s demonstration of harm suffered. The crimeof producing counterfeit currency is defined in terms of a perpetrator’sact and not in terms of the specific personal damage caused by the act.162 Such “option clauses” were in force in Scottish banks from 1730 to1765 and reserved the right to temporarily suspend payment in specie