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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 749for demand-deposit bank contracts would stamp out the legalcorruption which has plagued the institution of banking fromits very beginning. As we saw in our historical study of theevolution of banking, governments first overlooked the fraudulentnature of fractional-reserve banking. Then, when theeffects of the system became more evident, instead of adequatelydefining and defending the traditional principles ofproperty law, they became accomplices and later the drivingforce behind the corresponding expansionary processes,always with the goal of obtaining an easier source of financingfor their political projects. The evolution of banking on thefringe of legal principles has produced solely negative results:it has encouraged all sorts of fraudulent, irresponsible behaviors;it has triggered artificial credit expansion and highlydamaging, recurrent economic recessions and social crises;and it has ultimately determined the inevitable appearance ofthe central bank and an entire web of administrative regulationson financial and banking activities, regulations whichhave not achieved the objectives set for them and which, surprisinglytoday, on the threshold of the twenty-first century,continue to destabilize the world’s economies.4. The Proposed Model Promotes Stable, Sustainable EconomicGrowth, and Thus Drastically Reduces Market Transaction Costsand Specifically the Strains of Labor Negotiations. Over ninetyyears of chronic worldwide inflation and continuous, andduring many periods completely uncontrolled, credit expansionhave corrupted the behavioral habits of economic agents,and hence today, most believe inflation and credit expansionare necessary to stimulate economic development. Furthermorethe misconception that any economy not in an economicboom is therefore “stagnant” has become generalized. Peoplefail to see that rapid, exaggerated economic expansion isalways likely to have an artificial cause and must reverse inthe form of a recession. In short, we have become accustomedto living in manic-depressive economies and have adjustedour behavior to an unstable, disturbing pattern of economicdevelopment.However, following the proposed reform, this “manicdepressive”model of economic development would be