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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 735a 100 percent-reserve banking system for exclusively practicalreasons, believing this requirement would make governmentmonetary policy easier and more predictable. Therefore thetheorists of the Chicago School have been guilty of naiveté inascribing to governments the desire and ability to administer astable monetary policy under all circumstances. 33 This naivetéparallels that shown by modern neo-banking defenders of fractional-reservefree banking when they rely on spontaneousinterbank liquidation and clearing mechanisms to halt underall circumstances planned, simultaneous expansion by mostbanks. These theorists fail to see that although a fractionalreservefree-banking system would have more limitations thanthe current system, it would not prevent the creation of fiduciarymedia, nor, logically, would it immunize the marketagainst economic crises. Hence we must conclude that the onlyeffective way to rid society of special privileges and economic cycles isto establish a free-banking system governed by legal principles; thatis, a 100-percent reserve requirement. 3433 As Pascal Salin states in his article on Maurice Allais, “Toute l’histoiremonétaire montre que l’État a refusé de respecter les règles monétaires etque la source ultime de l’inflation provient de ce défaut institutionnel.”Pascal Salin, “Maurice Allais: un économiste liberal?” p. 11. Thus we cannottrust that a central bank, which will always be influenced to someextent by the current political scene, will be able to maintain a monetarypolicy which immunizes society against the evils of economic cycles, evenif the desire is present and a 100-percent reserve requirement is establishedfor private banking. This is so because nothing bars the centralbank from directly financing state expenditures or, via open-market operations,acquiring massive numbers of treasury bonds and other securities,and thus injecting liquidity into the system through the capital marketand temporarily distorting the interest rate and society’s structure of productivestages. This would set in motion the inexorable mechanisms ofeconomic cycles, which would trigger a severe depression. This is theprima facie argument against the conservation of the central bank, and itshows the necessity of combining the re-establishment of legal principlesin private banking with the complete deregulation of the sector and theabolition of the central bank. On the traditional strong leaning towardinterventionism of the Chicago School, see “Symposium: Chicago versusthe Free Market,” Journal of Libertarian Studies 16, no. 4 (Fall, 2002).34 On the Keynesian side, James Tobin, who received the Nobel Prize forEconomics in 1981, has proposed a “deposit currency” system which