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

734 Money, Bank Credit, and Economic Cyclesand in an interesting footnote he mentions the complete freebankingsystem, defended by Gary Becker, as one way toapproach this objective. 31Henry C. Simons comes closest to recognizing the juridical-institutionaldemands for a 100-percent reserve requirement.32 However, in general, Chicago theorists have defended31 Friedman does not mention Mises, who, nearly fifty years earlier inGerman and twenty-five years earlier in English, had already put forwarda detailed version of the same theory. Milton Friedman, A Programfor Monetary Stability, footnote 10. Gary Becker’s proposal was manyyears later published: Gary S. Becker, “A Proposal for Free Banking,”Free Banking, vol. 3: Modern Theory and Policy, White, ed., chap. 2, pp.20–25. Though Gary Becker could easily be classified with modern neobankingadvocates of fractional-reserve free banking, he recognizes that,in any case, a system which includes a 100-percent reserve requirementwould be a considerable improvement on the current financial andbanking system (p. 24).32 Irving Fisher also dealt with the legal aspects of a 100-percent reserverequirement. He indicated that in this systemdemand deposits would literally be deposits, consisting ofcash held in trust for the depositor . . . the check depositdepartment of the bank would become a mere storage warehousefor bearer money belonging to its depositors. (IrvingFisher, 100 Percent Money, p. 10)Unfortunately Fisher’s underlying economic theory was monetarist,and hence he never understood how the credit expansion whichresults from fractional-reserve banking affects society’s structure ofproductive stages. Moreover Fisher recommended an indexed standardbe established and the government retain control over monetary policy,to which Ludwig von Mises responded with sharp criticism (HumanAction, pp. 442–43). Specifically, Fisher’s use of the monetarist equationof exchange led to important errors in his theoretical analysis and economicforecasting. Fisher failed to see that aside from the macroeconomiceffects accounted for by his formula, growth in the money supply distortsthe productive structure and inexorably feeds crises and recessions. Thusin the late 1920s Fisher thought economic expansion would continue“indefinitely” and did not realize that it rested on an artificial foundationwhich was condemned to failure. Indeed, the Great Depression of 1929took him completely by surprise and nearly ruined him. On the intriguingpersonality of this American economist, see Irving N. Fisher’s book,My Father Irving Fisher (New York: A Reflection Book, 1956), and the biographyby Robert Loring Allen, Irving Fisher: A Biography.