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

748 Money, Bank Credit, and Economic Cyclesreserve requirement (Simons, Mints, Fisher, Hart, and Friedman)primarily sought to facilitate monetary policy and preventbank crises (point one above), but their macroeconomicmonetaristanalytical tools kept them from seeing that evenmore harmful than bank crises are cyclical economic crisesunleashed on the real productive structure by the fractionalreservebanking system. Only the complete abolition of legaltenderregulations and the total privatization of the stateissuedmoney now in existence will prevent governmentinstitutions from triggering economic cycles even once a 100-percent reserve requirement is established for private banking.Finally, we must recognize that the recommended systemwould not avoid all economic crises and recessions. It wouldonly avert the recurrent cycles of boom and recession whichwe now suffer (and which constitute the vast majority and themost serious). It would not prevent those isolated crises provokedby wars, natural disasters, or similar phenomenawhich, due to their sudden attack on the confidence and timepreference of economic agents, might cause shocks to the productivestructure and thus demand considerable, painfulreadjustments. Nonetheless we must not be deceived, as anumber of theorists are (mainly those adherents of “new classicaleconomics”), by the notion that all economic crises stemfrom external shocks. These theorists fail to realize that mostcrises have an endogenous origin and are fueled by the verycredit expansion which the banking sector brings about andcentral banks orchestrate. In the absence of this disruptiveinfluence on credit, the number of shocks would fall to a minimum,not only because the prime cause of instability in oureconomies would disappear, but also, as we will explain later,because governments would adopt much more disciplinedfiscal programs. With this increased restraint, the proposedsystem would act in time to abort many policies that wouldfoster financial irresponsibility and even violence, conflicts,and wars, which without a doubt, are also ultimately responsiblefor the isolated appearance of external shocks whichprove highly damaging to the economy.3. The Proposed System Is the Most in Tune with Private Property.The establishment of a 100-percent reserve requirement