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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 751Not only is this drop perfectly compatible with sustainableeconomic development from a theoretical and practical standpoint,but it would also guarantee that the benefits of suchgrowth would profit all citizens through a constant increase inthe purchasing power of their monetary units. 50This model of rising productivity, economic developmentand a money supply which grows slowly (at a rate of around1 percent) would generate, via a decrease in prices, an increasein the real income of the factors of production, especiallylabor, which in turn would result in an enormous fall in thenegotiation costs currently associated with collective bargaining.(Assuming the demand for money is stable, productivityrises at a rate of 3 percent and the money supply grows at arate of 1 percent, prices would tend to fall by approximately 2percent per year.) In this model, the real income of all factorsof production, especially labor, would be updated automatically,and hence collective bargaining, which presently createsso much tension and conflict in western economies, could beeliminated. Indeed this process would be relegated to thoseisolated cases in which, for example, a greater increase in productivityor in the market price of specific types of labor madeit necessary to negotiate even greater rises than those automaticallyreflected each year in real income with the decline inthe general price level. Moreover in these cases even the interventionof unions would be unnecessary (though the possibilityis not excluded), since market forces themselves, guided bythe entrepreneurial profit motive, would spontaneously provokethose income rises justified in relative terms. Therefore,in practice, collective bargaining would be limited to thoseisolated cases in which productivity rose less than average,50 George A. Selgin recently argued that the best monetary-policy rule isto allow the general price level to fall in accordance with growth in productivity.See his book, Less Than Zero: The Case for a Falling Price Level ina Growing Economy. We find this suggestion fundamentally sound. Nevertheless,for the reasons stated in chapter 8, we do not entirely supportSelgin’s theses. We particularly disagree with his view that the institutionalmeasure most conducive to his suggestion would be to establisha fractional-reserve free-banking system.