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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 773fundamental structure of these types cannot be modifiedwithout distorting and violating the most basic legal principles.Therefore the only conceivable way to introduce “new”financial products is to make different combinations of legitimate,existing legal contracts, though innovation possibilitiesin this field are quite limited. We must also remember that onmany occasions “innovations” are forced into existence by thefiscal voracity of governments and the welter of fiscal legislationthey introduce in all historical periods. In many cases,such “innovations” are aimed at diminishing as far as possiblethe payment of taxes, and they lead to the strangest and mostforced, complicated and juridically unnatural forms of business.At this point the direct violation of traditional legal principlesis only one step away, 75 and experience shows that thetemptation to cash in on the large profits fractional-reservebanking generates prompts many to take this step withouthesitation. Therefore it is essential in this field to maintain anattitude of constant, rigorous vigilance and prevention withrespect to the infringement of traditional legal principles.6. “The proposed system would not allow the money supply togrow at the same rate as economic development.” Economicagents have become accustomed to the current inflationaryenvironment and believe economic development is impossiblewithout a certain amount of credit expansion and inflation.Moreover various schools of economic thought havepraised increases in effective demand and tend to reinforceever popular inflationary appeals. Nevertheless, just as economicagents have adapted to an inflationary environment,they would adjust to one in which the purchasing power ofthe monetary unit rose gradually and continuously.Here again it is important to distinguish between two differentmeanings of the term “deflation” (and “inflation”)75 Hence this is another example which perfectly illustrates the acutecorruptive effects which the fiscal and economic interventionism of thestate exerts on the concept of substantive or material law, related socialhabits, and the sense of justice. We have dealt with this topic extensivelyin Huerta de Soto, Socialismo, cálculo económico y función empresarial, pp.126–33.