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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 755monetary-planning agency, on the control and management ofthe banking and financial system of any country. Even certaindistinguished politicians, such as the nineteenth-century AmericanPresident Andrew Jackson, understood this idea perfectlyand, motivated by it, fiercely opposed the establishment of anycentral bank. Unfortunately their influence was not strongenough to prevent the creation of the current central-planningsystem in the sector of banking and finance, nor any of this system’sharmful effects, past or present, on our economies. 55Moreover, as the Public Choice School indicates, privilegedspecial interest groups and politicians will tend toexploit any fiduciary monetary system based on a statemonopoly on the issuance of money. In fact, politicians facethe irresistible temptation to try to buy votes with funds createdfrom nothing, an enticement analyzed by theorists of the“political cycle,” among others. 56 Furthermore the possibilityof expanding money and credit allows politicians to financetheir expenditures without resorting to taxes, which arealways unpopular and painful. At the same time, with thiscourse of action, the decrease in the purchasing power ofmoney works in politicians’ favor, since income taxes are generallyprogressive. For these reasons it is especially importantthat we find a monetary system which, like the one proposed55 Thus we should be especially critical of those authors who, such asAlan Reynolds, Arthur B. Laffer, Marc A. Miles and others, attempt toestablish a pseudo-gold-standard in which the central bank continues toplay the leading role in monetary and credit policy, but with a referenceto gold. Friedman has appropriately characterized this pseudo-goldstandardas “a system in which, instead of gold being money, gold wasa commodity whose price was fixed by governments.” (See Friedman,“Has Gold Lost its Monetary Role?” p. 36). The proposals of Laffer andMiles appear in their book, International Economics in an Integrated World(Oakland, N.J.: Scott and Foresman, 1982). A brief, brilliant critique ofthese proposals can be found in Salerno, “Gold Standards: True andFalse,” pp. 258–61.56 See, for example, chapter 5 (“Ciclo Político-Económico”) of Juan FranciscoCorona Ramón’s book, Una introducción a la teoría de la decisiónpública (Public Choice) (Alcalá de Henares; Madrid: Instituto Nacional deAdministración Pública, 1987), pp. 116–42, and the bibliography providedtherein. Remember also the references of footnote 57 of chapter 6.