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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 753most salient features of gold, and possibly the most influentialin gold’s evolutionary predominance as money par excellence,is its homogeneity and immutability throughout thecenturies. Thus the main advantage of the proposed model isthat it would preclude the sudden reductions in the volume ofcredit and, hence, in the quantity of money in circulation,which until now have been repetitive in the “elastic” monetaryand credit systems which prevail in the world. In short, apure gold standard with a 100-percent reserve requirementwould prevent deflation, understood as any drop in the quantityof money or credit in circulation. 525. The Proposed System Would Put an End to Feverish FinancialSpeculation and its Damaging Effects. We could liken banks’ creationof money through credit expansion to the opening of Pandora’sbox. To close it again, we must eliminate the incentivesthat tempt individuals to indulge in all kinds of unscrupulous,fraudulent behaviors. Such incentives are extremely harmful,since they corrupt the established habit of saving and workingconscientiously; that is, the habit of making a constant, honest,responsible, and long-term economic effort. 53 Furthermore52 We must remember that during the Great Depression of 1929, themoney supply contracted by around 30 percent. A contraction of thissort would be impossible with a pure gold standard and a 100-percentreserve requirement, given that the monetary system we propose isinelastic with respect to contractions. Hence in our model, the monetarycontraction which many mistakenly identify as the main cause of theGreat Depression would not have occurred in any case. At the sametime, it is highly improbable that the combination of a pure gold standardand a 100-percent reserve requirement has ever resulted in aninflationary rise in prices. See Mark Skousen, Economics on Trial: Lies,Myths and Realities (Homewood, Ill.: Business One Irwin, 1991), pp.133–38. In fact, in no year from 1492 to the present has the total supplyof gold increased by more than 5 percent, and the average increase, aswe have already indicated, has been between 1 and 3 percent per year.53 In the exact words of Maurice Allais, “spéculation, frénétique etfébrile, est permise, alimentée et amplifiée par le crédit tel qui fonctionneactuellement.” Maurice Allais, “Les conditions monétaires d’uneéconomie de marchés,” p. 326. Perhaps there is no more concise and elegantway to refer to what the Spanish have in recent years popularly