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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 719International Currency and Banking Policy.” There, before themonetary and banking experts of his day, Mises expressed hisideas as follows:It is characteristic of the gold standard that the banks are notallowed to increase the amount of notes and bank balanceswithout a gold backing, beyond the total which was in circulationat the time the system was introduced. Peel’s BankAct of 1844, and the various banking laws which are moreor less based on it, represent attempts to create a pure goldstandard of this kind. The attempt was incomplete because itsrestrictions on circulation included only banknotes, leaving out ofaccount bank balances on which cheques could be drawn. Thefounders of the Currency School failed to recognize theessential similarity between payments by cheque and paymentsby banknote. As a result of this oversight, thoseresponsible for this legislation never accomplished theiraim. 3Mises would later explain that a banking system based onthe gold standard and a 100-percent reserve requirementwould tend to push prices down slightly, which would benefitmost citizens, since it would raise their real income, notthrough a nominal increase in earnings but through a continualreduction in the prices of consumer goods and servicesand relative constancy in nominal income. Mises deems sucha monetary and banking system far superior to the currentsystem, which is beset with chronic inflation and recurrentcycles of expansion and recession. In reference to the economicdepression then afflicting the world, Mises concludes:The root cause of the evil is not in the restrictions, but in theexpansion which preceded them. The policy of the banks doesnot deserve criticism for having at last called a halt to the expansionof credit, but, rather, for ever having allowed it to begin. 43 This memorandum had been forgotten and was rediscovered in theLeague of Nations archives when Richard M. Ebeling was preparingmaterials for the book, Money, Method, and the Market Process, pp. 78–95.The above excerpt appears on p. 90; italics added.4 Ibid., p. 91; italics added.