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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 7839. “The supposed failure of a 100-percent reserve requirement inArgentina during the regime of General Perón.” The twentiethcentury provides one historic attempt, at least in a rhetoricalsense, to establish a 100-percent reserve requirement for banking.However in this case, the reform was not accompanied byan overall privatization of the monetary system and the eliminationof the central bank. Instead, credit was completelynationalized, a step which drove inflation to a high level andcaused profound credit distortions which devastated theArgentinian economy. Therefore this example does not illustrateany disadvantage of the reform we have proposed. Onthe contrary, it offers a historical confirmation of the harmfuleffects public-sector intervention exerts on the financial, monetaryand credit sector. Let us analyze the history of the Argentinian“experiment” in greater detail.The reform was introduced shortly after General Peróntook office in Argentina in 1946; it was implemented viadecree-law number 11554, which was ratified by law 12962.These legal provisions nationalized bank deposits, as theycontained the official declaration that the nation of Argentinawould guarantee all deposits from that point on. The explanatorystatement of these texts included, among other considerations,the following:Indeed, now that all deposits remain in the banks at theexpense of the central bank, which defrays the financial andAt any rate, we must admit, as Rothbard does, that such growth inthe value of gold would, mainly during the first years following thetransition, give an enormous push to the industry of gold mining anddistribution, and consequently would somewhat modify the presentstructure of international trade, migratory flows and capital. MurrayRothbard later changed his mind, and in order to prevent banks fromprofiting illegitimately, he suggested that bank bills form the sole basis forgold conversion. This measure would force a deflation of the monetarystock corresponding to deposits. Despite this change in Rothbard’s position,we find our proposal (to be presented further on) quite superior,since it would avoid the unnecessary deflation which would result fromhis. See Murray N. Rothbard, “The Solution,” The Freeman: Ideas on Liberty(November 1995): 697–702.