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

712 Money, Bank Credit, and Economic Cycleswere fully aware of it, to the extent that these individuals andall other economic agents subjectively considered demanddeposits and notes to be perfect money substitutes, the clausereferred to would only be capable of preventing the immediatesuspension of payments or failure of banks in the event ofa bank run. It would not prevent all of the recurrent processesof expansion, crisis and recession which are typical of fractional-reservebanking, seriously harm third parties and disruptthe public order. (It does not matter which “optionclauses” are included in contracts, if the general public considersthe above instruments to be perfect money substitutes.)Hence, at most, option clauses can protect banks, butnot society nor the economic system, from successive stagesof credit expansion, boom and recession. Therefore Whiteand Selgin’s last line of defense in no way abolishes the factthat fractional-reserve banking inflicts severe, systematicdamage on third parties and disrupts the public order. 163163 It is interesting to note that many free-banking theorists fail to seethat fractional-reserve banking is illegitimate from the standpoint ofgeneral legal principles, and instead of proposing the eradication offractional-reserve banking, they suggest the banking system be completelyprivatized and the central bank be eliminated. This measurewould certainly tend to check the practically unlimited abuses authoritieshave committed in the financial field, but it would not prevent thepossibility of abuses (on a smaller scale) in the private sphere. This situationresembles that which would arise if governments were allowedto systematically engage in murder, robbery, or any other crime. Theharm to society would be tremendous, given the enormous power andthe monopolistic nature of the state. The privatization of these criminalacts (an end to governments’ systematic perpetration of them) wouldundoubtedly tend to “improve” the situation considerably, since thegreat criminal power of the state would disappear and private economicagents would be permitted to spontaneously develop methods to preventand defend themselves against such crimes. Nevertheless the privatizationof criminal activity is no definitive solution to the problemscrime poses. We can only completely solve these problems by fightingcrime by all possible means, even when private agents are the perpetrators.Thus we conclude with Murray N. Rothbard that in an ideal freemarketeconomic system:[F]ractional-reserve bankers must be treated not as mereentrepreneurs who made unfortunate business decisions but