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

722 Money, Bank Credit, and Economic Cyclesthe conservation of the central bank and the adoption of anindexed monetary unit. In fact, according to Mises, the suggestionto reestablish a 100-percent reserve requirement, yetpreserve the central bank, is insufficient:[I]t would not entirely remove the drawbacks inherent inevery kind of government interference with banking. Whatis needed to prevent any further credit expansion is to placethe banking business under the general rules of commercialand civil laws compelling every individual and firm to fulfillall obligations in full compliance with the terms of thecontract. 7Mises again expresses his ideas on a 100-percent reserverequirement in an appendix (on “Monetary reconstruction”)to the 1953 English reissue of The Theory of Money and Credit,where he explicitly states:The main thing is that the government should no longer bein a position to increase the quantity of money in circulationand the amount of checkbook money not fully—that is, 100percent—covered by deposits paid in by the public.Furthermore, in this appendix Mises also proposes a processof transition to the ideal system, with the following goal:No bank must be permitted to expand the total amount ofits deposits subject to check or the balance of such depositsof any individual customer, be he a private citizen or theU.S. Treasury, otherwise than by receiving cash deposits inlegal-tender banknotes from the public or by receiving acheck payable by another domestic bank subject to the samelimitations. This means a rigid 100 percent reserve for all futuredeposits; that is, all deposits not already in existence on the firstday of the reform. 87 Mises, Human Action, 3rd ed., p. 443. Here, for the first time, Mises indicatesthat the problems related to the banking system stem from the factthat its participants are not subject to traditional legal principles. This isthe fundamental idea Murray N. Rothbard would later develop andwhich lies at the heart of our thesis.8 Mises, The Theory of Money and Credit, pp. 481 and 491; italics added.