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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 721a 100-percent reserve requirement with his objection not onlyto the central bank, but also to a fractional-reserve free-bankingsystem: although such a system would greatly limit theissuance of fiduciary media, it would be inadequate to completelyeliminate credit expansion nor the recurrent boomsand economic recessions which inevitably come with it. 6In 1949 Yale University Press published the first Englishedition of Ludwig von Mises’s economic treatise, entitledHuman Action: A Treatise on Economics. In this English editionMises repeats the arguments from the German edition, buthe expressly refers to Irving Fisher’s plan for establishing a100-percent reserve requirement for banking. Mises disapprovesof Fisher’s plan, not because it includes a proposal fora 100-percent reserve requirement, which Mises fully supports,but because Fisher seeks to combine this measure withUmlaufsmittelausgabe versagt gegenüber einer Notstandsgesetzgebung.(Mises, Nationalökonomie, 2nd ed. [Munich:Philosophia Verlag, 1980, p. 403)6 In this sense, Mises’s footnote on p. 402 of Nationalökonomie is particularlyillustrative. It reads:Für die Katallaktik ist der Begriff “normale Kreditausweitung”sinnlos. Jede Kreditausweitung wirkt auf die Gestaltung derPreise, Löhne und Zinssätze und löst den Prozess aus, den zubeschreiben die Aufgabe der Konjunkturtheorie ist.This footnote was later translated into English on p. 442 of the 3rd rev.ed. of Human Action:The notion of “normal” credit expansion is absurd. Issuanceof additional fiduciary media, no matter what its quantitymay be, always sets in motion those changes in the pricestructure the description of which is the task of the theory ofthe trade cycle. Of course, if the additional amount issued isnot large, neither are the inevitable effects of the expansion.This statement from Mises has generated substantial confusion amongthose members of the Austrian School who defend a fractional-reservefree-banking system (White, Selgin, Horwitz, etc.). The assertion revealsMises’s belief that such a system would not escape the phases of expansionand recession characteristic of the economic cycle (though theywould be less severe than those which affect current banking systemsbacked by a central bank). Remember also what we said in footnote 120of chapter 8.