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

724 Money, Bank Credit, and Economic Cyclesrefers to the 100-percent reserve requirement in a footnote ofthis seminal article. He states:As we have already emphasized, the older English theoreticiansof the currency school had a firmer grasp of thisthan the majority of economists who came after them. Thecurrency school hoped also to prevent cyclical fluctuationsby the regulation of the note issue they proposed. But sincethey took only the effects of the note issue into account andneglected those of deposit money, and the restrictionsimposed upon bank credit could always be got round byan expansion of transfers through bank deposits, Peel’sBank Act and the central bank statute modelled upon itcould not achieve this aim. The problem of the prevention ofcrises would have received a radical solution if the basic conceptof Peel’s Act had been consistently developed into the prescriptionof 100 percent gold cover for bank deposits as well asnotes. 10In his remarkable work, Monetary Nationalism and InternationalStability, published twelve years later in 1937, F.A.Hayek again speaks of establishing a banking system basedon a 100-percent reserve requirement. At that time, theoristsof the Chicago School had already made a similar proposal,which they attempted to base on the central bank’s papercurrency. In contrast Hayek asserts that the ideal solutionwould be to combine a 100-percent reserve requirement forbanking with a return to a pure gold standard. In this way, allbank-notes and deposits would be backed by gold 100 percent,and a worldwide, sound monetary system effective at preventinggovernment manipulation and “monetary nationalism”would emerge. Hayek concludes:10 Hayek, “The Monetary Policy of the United States after the Recoveryfrom the 1920 Crisis,” chapter 1 of Money, Capital and Fluctuations:Early Essays, p. 29; italics added. This article is the English translationof the theoretical portion of the original, which was published in Germanwith the title, “Die Währungspolitik der Vereinigten Staaten seitder Überwindung der Krise von 1920,” Zeitschrift für Volkswirtschaftund Sozialpolitik, vols. 1–3, no. 5 (1925): 25–63 and vols. 4–6, pp.254–317.