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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 725The undeniable attractiveness of this proposal lies exactly inthe feature which makes it appear somewhat impracticable,in the fact that in effect it amounts . . . to an abolition of depositbanking as we know it. 11Nearly forty years later, F.A. Hayek again took up the subjectof money and banking in his famous work, Denationalizationof Money. Although modern fractional-reserve free-bankingtheorists have used this book to justify their model, thereis no doubt that Hayek proposes a system of free banking andprivate issuance of monetary units and that ultimately hewishes to see the banking model with a 100-percent reserverequirement prevail. In fact in the section he devotes to thechange of policy in commercial banking, Hayek concludesthat the vast majority of banksclearly would have to be content to do their business inother currencies. They would thus have to practise a kind of“100 percent banking,” and keep a full reserve against alltheir obligations payable on demand.Hayek adds a harsh criticism of the current banking system:An institution which has proved as harmful as fractionalreserve banking without the responsibility of the individualbank for the money (i.e., cheque deposits) it created cannotcomplain if support by a government monopoly that hasmade its existence possible is withdrawn. 1211 Hayek, Monetary Nationalism and International Stability, pp. 81–84, esp.p. 82; italics added. Hayek especially praises the proposal for a 100-percentreserve requirement “because it goes to the heart of the problem”(p. 81). Hayek sees only one disadvantage in this plan, apart from itsbeing “somewhat impracticable”: it seems unlikely that unbacked bankdeposits would not appear in some other legal form, given that “bankingis a pervasive phenomenon” (p. 82). Later we will deal with thisobjection.12 Hayek, Denationalization of Money, pp. 94–95 and p. 55. The aboveexcerpts appear on p. 119 of the 2nd rev. expanded ed. (London: Instituteof Economic Affairs, 1978). Hayek also calls for the drawing of a