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

718 Money, Bank Credit, and Economic CyclesThe most important prerequisite of any cyclical policy, nomatter how modest its goal may be, is to renounce everyattempt to reduce the interest rate, by means of banking policy,below the rate which develops on the market. Thatmeans a return to the theory of the Currency School, whichsought to suppress all future expansion of circulation creditand thus all further creation of fiduciary media. However,this does not mean a return to the old Currency School program,the application of which was limited to banknotes.Rather it means the introduction of a new program based onthe old Currency School theory, but expanded in the light ofthe present state of knowledge to include fiduciary mediaissued in the form of bank deposits. The banks would beobliged at all times to maintain metallic backing for all notes—except for the sum of those outstanding which are not now coveredby metal—equal to the total sum of the notes issued and bankdeposits opened. That would mean a complete reorganization ofcentral bank legislation. . . . By this act alone, cyclical policywould be directed in earnest toward the elimination of crises. 2Two years later, on October 10, 1930, before the FinancialCommittee of the League of Nations in Geneva, Mises delivereda memorandum on “The Suitability of Methods of AscertainingChanges in the Purchasing Power for the Guidance of2 Mises, Geldwertstabilisierung und Konjunkturpolitik, p. 81; English translationOn the Manipulation of Money and Credit, pp. 57–173. The aboveexcerpt appears on pp. 167–68 and the italics have been added. Theexception Mises includes between dashes indicates that he, in keepingwith the spirit of Peel’s Act, merely calls for a 100 percent reserve in relationto newly-issued fiduciary media (deposits and banknotes) whichwould mean that the stock of these already issued at the time the reformis launched would remain unbacked by specie. The implementation ofMises’s proposal would represent a large step forward and in practicecould be achieved quite easily without initially producing substantialchanges in the market value of gold. However the proposal is imperfect.It would leave banks without backing on those bills and deposits issuedin the past, and banks would thus be particularly vulnerable to possiblecrises of confidence. Therefore in this chapter we propose a more radicalprogram consisting of a 100-percent reserve requirement on all fiduciarymedia (whether already issued or not). Bettina Bien Greaves hasdeveloped Mises’s proposal in detail in “How to Return to the GoldStandard,” The Freeman: Ideas on Liberty (November 1995): 703–07.