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

720 Money, Bank Credit, and Economic CyclesTen years after delivering this memo before the League ofNations, Mises once more defended a 100-percent reserverequirement, this time in the first German edition of his allembracingeconomic treatise, published as Nationalökonomie:Theorie des Handelns und Wirtschaftens (Economics: Theory ofAction and Exchange). Here Mises again presents his thesis thatthe ideas essential to the Currency School require the applicationof a 100-percent reserve requirement to all fiduciarymedia; that is, not only to banknotes, but also to bankdeposits. Moreover, in this book Mises advocates the abolitionof the central bank and indicates that while this institutioncontinues to exist, even if the issuance of new fiduciarymedia (bills and deposits) is strictly prohibited, there willalways be a danger that “emergency” budget difficulties willbe cited as political justification for issuing new fiduciarymedia to help finance the needs of the state. Mises implicitlyresponds thus to theorists of the Chicago School who in the1930s proposed that a 100-percent reserve requirement be setfor banking, but that the monetary base remain fiduciary, andthat the responsibility for issuing and controlling the stock ofmoney continue to fall to the central bank. Mises does notconsider this the best solution. In this case, even with a 100-percent reserve requirement, money would still ultimatelydepend on a central bank and would therefore be subject toall sorts of pressures and influences, particularly the dangerthat in a financial emergency the state would exercise itspower to issue currency in order to finance itself. Accordingto Mises, the ideal solution would thus be to establish a systemof free banking (i.e., without a central bank) subject totraditional legal principles (and hence, a 100-percent reserverequirement). 5 In this book Mises accompanies his defense of5 Mises’s exact words follow:Wenn heute, dem Grundgedanken der Currency-Lehreentsprechend, auch für das Kassenführungsguthaben volle—hundertprozentige—Deckung verlangt wird, damit dieErweiterung der Umlaufsmittelausgabe auch in dieserGestalt unterbunden werde, dann ist das folgerichtiger Ausbauder Ideen, die jenem alten englischen Gesetz zugrundelagen.. . . Auch das schärfste Verbot der Erweiterung der