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

766 Money, Bank Credit, and Economic Cyclesimportance of preventing governments from using inflationand credit expansion to finance their expenditures in a concealedmanner. Moreover we need not reiterate the details ofthe obscure legal basis and harmful effects of private banks’power to issue loans and deposits.4. “A 100-percent reserve requirement is an example of stateintervention and jeopardizes the contractual freedom of the parties.”Modern neo-banking advocates of fractional-reserve freebanking often argue that it is “inadmissible” from a “libertarian”standpoint to limit the contractual freedom of the parties,specifically, the ability of depositors to freely enter into pactswith their bankers by which the former agree to opendemand-deposit accounts on which only a fractional reserve isto be maintained. In the first three chapters we saw that a 100-percent reserve requirement on demand deposits would not atall constitute intolerable government interference (“legislationthrough commands,” in Hayekian terminology). Instead, itwould merely represent the natural application of traditionalproperty-law principles to the monetary irregular-depositcontract (“substantive or material law,” in Hayekian terminology).66 Furthermore a voluntary decision by two parties toenter into a contract and full knowledge of its cause (which,incidentally, is not usually the case in the present financial andbanking system) are necessary conditions for the legitimacy ofan operation, but they alone are in no way sufficient to grant66 [T]he free market does not mean freedom to commit fraud orany other form of theft. Quite the contrary. The criticism maybe obviated by imposing a 100% reserve requirement, not asan arbitrary administrative fiat of the government, but as apart of the general legal defense of property against fraud.(Rothbard, Man, Economy, and State, p. 709)As Jevons stated:“It used to be held as a general rule of law, that any presentgrant or assignment of goods not in existence is withoutoperation,” and this general rule need only be revived andenforced to outlaw fictitious money-substitutes. Then bankingcould be left perfectly free and yet be without departurefrom 100% reserves. (Jevons, Money and the Mechanism ofExchange, pp. 211–12)