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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 745complete freedom, the predominant form of money willalways be a metallic one with at least those essential characteristicsthat until now gold alone has offered: immutability,great homogeneity, and above all, scarcity. For the scarcermoney is, and the more unlikely significant increases ordecreases in its volume within relatively short periods of timeare, the better money fulfills its function. 443AN ANALYSIS OF THE ADVANTAGES OF THEPROPOSED SYSTEMIn this section we will consider the main advantages afree-banking system which adheres to legal principles, a 100-percent reserve requirement and a completely private form ofmoney (gold) offers as opposed to the system of financial centralplanning (central bank) which currently controls thefinancial and banking spheres of all countries.1. The Proposed System Prevents Bank Crises. Even the mostprominent defenders of fractional-reserve free banking haverecognized that the establishment of a 100-percent reserverequirement would put an end to bank crises. 45 Indeed bankcrises stem from the inherent lack of liquidity of these institutions,which use in the form of loans most of the moneydeposited with them on demand. If, in keeping with traditional44 Therefore it is through no caprice of history that in a context of freedomgold has prevailed as generally accepted money, since it has theessential characteristics which, from the standpoint of general legalprinciples and economic theory, a widely accepted medium of exchangemust have. In this area, as in many others (the family, property rights,etc.), economic theory has backed the spontaneous results of the processof social evolution.45 Among others, George A. Selgin, who confirms that “a 100-percentreserve banking crisis is an impossibility.” Selgin, “Are Banking Crisesa Free-Market Phenomenon?” p. 2.