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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 761with it the money supply, and thereby trigger recurrent cyclesof boom and recession.A significant number of totally legitimate activities wouldremain to sustain the banking business, and bankers couldcontinue to pursue these activities, thus fulfilling the needs ofconsumers. One such activity would be true credit intermediation,which consists of loaning, with a differential, funds previouslylent banks by their customers (not demand deposits).In addition, as deposit banks (with a 100-percent reserverequirement), institutions could provide custody and safekeeping,while charging the corresponding market price forthis service and even combining it with other peripheral ones(the making of payments, transfers, records of customers’operations, etc.). If to this we add the custody and managementof securities, the rental of safe deposit boxes, etc., we geta reasonably good idea of the extensive range of legitimatefunctions banks could continue to perform.Therefore the belief that the reestablishment of a 100-percentreserve requirement would mean the death of privatebanks is unjustified. There would simply be a modification,itself largely evolutionary and non-traumatic, to their structureand operations. We have already mentioned the strongprobability of the spontaneous development of a banking systemcomprised of a network of mutual funds, deposit institutionsthat maintain a 100-percent reserve ratio, and companiesthat specialize in providing accounting and cashier services totheir customers. Hence we conclude with Ludwig von Mises:It is clear that prohibition of fiduciary media would by nomeans imply a death sentence for the banking system, as issometimes asserted. The banks would still retain the businessof negotiating credit, of borrowing for the purpose oflending. 62In short, banks could continue to engage in a large numberof activities, thus satisfying the needs of consumers andobtaining a legitimate profit in return.62 Mises, The Theory of Money and Credit, p. 361.