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

764 Money, Bank Credit, and Economic CyclesTherefore a system composed of a pure gold standard anda 100-percent reserve requirement would not weaken economicdevelopment. In fact, such a system would give rise toa model of stable, continuous development, free from themanic-depressive reactions which we have, with difficulty,become used to and which, unfortunately, involve the regularmalinvestment of a huge quantity of society’s scarceresources, to the serious detriment of sustainable economicgrowth and harmony in society.3. “The proposed model would penalize those who profit from thecurrent banking and financial system.” It has at times beenargued that the recommended system would unjustly penalizeall those who profit from the present financial and bankingsystem. Among its chief beneficiaries we must first list thegovernment, which, as we know, manages to finance itsexpenditures (directly and indirectly) via credit expansion,without having to resort to the politically painful measure ofraising taxes. Next we could mention bankers themselves(who line their pockets by the same procedures as the government,yet directly and privately), and also depositors, if theyreceive interest on their deposits and “do not pay” for the setof peripheral services banks perform. 64Nevertheless those who voice this objection do not takeinto account that many of the supposed “profits” individualsobtain from the banking system are not truly profits. Indeedit is inaccurate to argue that depositors currently enjoy substantialbenefits (in the form of cashier, payment and bookkeepingservices) without paying for them, since depositorspercent), the nominal market interest rate will be approximately 2.5 percentper year. In footnote 49 we supposed nominal interest rates wouldbe even lower, due to population growth and a consequent, perenniallow increase in the demand for money.64 Under competitive conditions the benefits are partly enjoyedby the holders of fractionally-backed bank liabilities themselves,whose gain takes the form of explicit interest paymentsor lowered bank service charges or a combination ofthese. (Selgin, “Are Banking Crises a Free-Market Phenomenon?”p. 3).