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

726 Money, Bank Credit, and Economic CyclesMURRAY N. ROTHBARD AND THE PROPOSALOFAPURE GOLDSTANDARD WITH A 100-PERCENT RESERVE REQUIREMENTIn 1962 Professor Murray N. Rothbard’s now classic article,“The Case for a 100-Percent Gold Dollar,” appeared in thebook, In Search of a Monetary Constitution 13 (which was editedby Leland B. Yeager and also contains articles by James M.Buchanan, Milton Friedman, Arthur Kemp, and others). Inthis article, Rothbard first develops his proposal for a puregold standard based on a free-banking system with a 100-percentreserve requirement. In this paper, Rothbard criticizes allwho support a return to the spurious gold standard rooted ina fractional-reserve banking system controlled by a centralbank. Instead he suggests what he views as the only coherent,stable long-term solution: a free-banking system with a 100-percent reserve requirement, the abolition of the central bank,and the establishment of a pure gold standard. According toRothbard, the result would be the prevention not only of therecurrent cycles of boom and recession caused by fractionalreservebanking, but also of the possibility, even with a 100-percent reserve requirement as defended by Chicago Schooltheorists in the 1930s, that the conservation of the central bankshould leave the entire system vulnerable to the political andfinancial needs of each moment.definite distinction between simple deposit banking (to which a 100-percentreserve requirement would apply) and investment banking, whichwould be limited to the lending of those funds customers first lend theirbanks. Hayek concludes:I expect that it will soon be discovered that the business ofcreating money does not go along well with the control oflarge investment portfolios or even control of large parts ofindustry. (pp. 119–20, 2nd ed.)Sharp, yet just criticism of Hayek’s other proposals related to the denationalizationof money and the establishment of a currency based on acommodities index (which are only indirectly related to our object ofstudy) appears in Murray N. Rothbard, “The Case for a Genuine GoldDollar,” in The Gold Standard, Llewellyn H. Rockwell, Jr., ed. (Lexington,Mass.: Lexington Books), 1985, pp. 2–7.13 In Search of a Monetary Constitution, Leland B. Yeager, ed. (Cambridge,Mass.: Harvard University Press, 1962).