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

716 Money, Bank Credit, and Economic Cycles1A HISTORY OF MODERN THEORIES IN SUPPORT OFA 100-PERCENT RESERVE REQUIREMENTWe know that distrust of fractional-reserve banking datesback at least as far as the Salamancan theorists of the sixteenthand seventeenth centuries, David Hume in the eighteenth century,theorists of the school of Jefferson and Jackson in thedecades following the founding of the United States, and theimportant group of theorists from nineteenth-century continentalEurope (Modeste and Cernuschi in France; Michaelis,Hübner, Geyer, and Tellkampf in Germany). Moreover, certainhighly distinguished economists of the twentieth century,such as Ludwig von Mises and at least four recipients of theNobel Prize for Economics (Friedrich A. Hayek, Milton Friedman,James Tobin, and Maurice Allais) have at some pointdefended the establishment of a 100-percent reserve requirementon demand deposits placed at banks.THE PROPOSAL OF LUDWIG VON MISESLudwig von Mises was the first twentieth-century economistto propose the establishment of a banking system with a100-percent reserve requirement on demand deposits. Misesmade his recommendation in the first edition of his book, TheTheory of Money and Credit, published in 1912. At the end ofthis first edition, in a section literally reproduced in the second,which was printed in 1924, Mises draws the followingconclusion:Fiduciary media are scarcely different in nature frommoney; a supply of them affects the market in the same wayas a supply of money proper; variations in their quantityinfluence the objective exchange value of money in just thesame way as do variations in the quantity of money proper.Hence, they should logically be subjected to the same principlesthat have been established with regard to moneyproper; the same attempts should be made in their case aswell to eliminate as far as possible human influence on theexchange ratio between money and other economic goods.