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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 747societies against recurrent economic crises. In fact, under thesecircumstances, the volume of loans could not increase withouta prior, parallel increase in society’s real, voluntary saving.Under such conditions, it would be impossible to imagine thatthe productive structure could be distorted as a result of discoordinationin the behavior of those economic agents whoinvest and those who save. The best guarantee againstintertemporal maladjustments in the productive structure isobservance of the traditional legal principles present in theinnermost logic behind the legal institutions related to theirregular-deposit contract and property law. 47Contrary to the belief of the Chicago theorists (those whoadvocated a 100-percent reserve requirement for banking), theeradication of economic crises and recessions also clearlydepends upon the total privatization of money (pure goldstandard). For if the central bank continues to be responsiblefor the issuance of purely fiduciary money, there will never beany guarantee that this institution, via open-market operationson the stock exchange, could not temporarily and artificiallyreduce interest rates and inject capital markets with artificialliquidity which, in the end, would exert exactly the samediscoordinating effects on the productive structure as creditexpansion initiated by private banks without the backing ofreal savings. 48 The key Chicago defenders of a 100-percent47 An accurate definition of property rights with respect to the monetarybank-deposit contract (100 percent reserve) and a strong, effectivedefense of these rights is therefore the only prerequisite for a “stablemonetary system,” a goal Pope John Paul II views as one of the state’s(few) key responsibilities in the economy. See John Paul II, CentesimusAnnus: Encyclical Letter on the Hundredth Anniversary of Rerum Novarum,1991, no. 48 (London: Catholic Truth Society, 1991), pp. 35–36. Here JohnPaul II states: “Economic activity, especially the activity of a marketeconomy, cannot be conducted in an institutional, juridical or politicalvacuum.” This assertion harmonizes perfectly with our support for theapplication of legal principles to the concrete case of the monetary bankdepositcontract.48 As we know, the government may also cause horizontal (intratemporal)discoordination in the productive structure by issuing new moneyto finance a portion of its expenditures.