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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 723Though further on we will again deal with the process oftransition to the ideal banking system, we observe here thatMises, in keeping with his 1928 writings, proposes the samesystem of transition as the one applied to banknotes withPeel’s Act (which required that only newly-created bills bebacked 100 percent by specie). 9FRIEDRICH A. HAYEK AND THE PROPOSALOFA100-PERCENTRESERVE REQUIREMENTFriedrich A. Hayek, undoubtedly Mises’s most brilliantdisciple, first wrote about a 100-percent reserve requirementwhen, at the age of twenty-five, he published the article, “TheMonetary Policy of the United States after the Recovery fromthe 1920 Crisis,” following his return from a study tour of theUnited States. Indeed, in this article, Hayek strongly criticizesthe monetary policy the Federal Reserve had put into operationat the time. The Fed’s policy was designed to maintain thestability of the dollar’s purchasing power in a context of rapidlygrowing productivity, and it had already begun to generatethe substantial credit expansion which would ultimatelycause the Great Depression. For the first time in his life, Hayek9 Despite Mises’s crystal clear statements in favor of a 100-percentreserve requirement, his defense of free banking as an indirect steptoward the ideal of a 100 percent reserve (and thus toward a bankingsystem subject to traditional legal principles) has prompted some Austriantheorists of the modern Neo-Banking School to make a self-interestedinterpretation of Mises’s position. Thus these theorists view Misesas a defender of fractional-reserve free banking first, and of bankingwith a 100 percent reserve second. For instance, see White, “Mises onFree Banking and Fractional Reserves,” pp. 517–33. In an interestingarticle, Joseph T. Salerno recently showed White’s position to be untenable:because he overlooks important passages in the very works ofMises that he cites, and because he ignores significant developmentsin Mises’s theory of money that occurred betweenthe publication of the first German edition of The Theory ofMoney and Credit in 1912 and the publication of Nationalökonomiein 1940. (Salerno, “Mises and Hayek Dehomogenized,”pp. 137–46)