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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 757operates with a fractional reserve, permits the ex nihilo creationof purchasing power which benefits the state and certainindividuals and companies, to the detriment of the rest ofsociety. This possibility is exploited mainly by the government,which uses it as a mechanism for financing its expenditureswithout having to resort to the most obvious and politicallycostly route, an increase in taxes. Although governmentstry to conceal this financing mechanism by rhetoricallydemanding that budgets be financed in an “orthodox” manner,and that the deficit not be directly funded through theissuance of currency and credit, in practice the result is quitesimilar when a significant number of the treasury bonds governmentsissue to finance their deficit are later purchased bycentral and private banks with new money of their own creation(indirect process of monetization of the national debt).Furthermore we should emphasize that the hidden expropriationof citizens’ wealth, an action permitted by the process offiduciary inflation, profits not only governments, but alsobankers themselves. Indeed, because bankers operate with afractional reserve and governments do not oblige them todevote all credit expansion to financing the public sector(through the purchase of treasury bonds), banks also carry outa gradual, diffuse expropriation of a major portion of the purchasingpower of citizens’ monetary units, while banks’ balancesheets reflect the amassment of considerable assetswhich are the cumulative result of this historical process ofexpropriation. In this sense, bankers’ protests against the suggestionthat they be required to devote such a large percentageof their assets to financing the public deficit must be understoodas one side of an argument between the two “accomplices”in the socially detrimental credit-expansion process,accomplices who “negotiate” between themselves which shareof the “profits” each will take.In contrast to the above system, a pure gold standard witha 100-percent reserve requirement would oblige states to fullyspecify their expenditures and the sources of their income,which would prevent them from resorting to the covert financingavailable in inflation and credit expansion. Moreover, such asystem would also preclude private bankers from profiting from