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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 785by the central bank in the form of a discount to the differentbanks, with no limit on volume or expansionary capacity.Hence this enormous power would be used to favor thoseinstitutions most sympathetic to the current political regime.Consequently, and despite its initial rhetoric, Perón’s reformfostered unprecedented growth in the volume of credit, atremendous expansion of means of payment, and severe inflationwhich grossly distorted the country’s productive structureand gave rise to a profound economic recession from whichArgentina has taken many years to recover. For example, duringthe nine years of Perón’s first period in office (from 1946 to1955), the money supply increased by more than 970 percent,and the gold and foreign exchange backing of bills issued fellfrom 137 percent in 1946 to slightly over 3.5 percent in 1955.The reform was abolished by the revolutionaries whoousted General Perón in 1955 and again privatized deposits.Nonetheless this measure was inadequate to end financialchaos, and private banks resumed their expansionary policieswith new enthusiasm, thus following the example set by thecentral bank under Perón. As a result, Argentinian hyperinflationbecame chronic and infamous all over the world. 91We may conclude that the designers of the Argentinianexperiment sought merely to reserve the advantages of credit91 Curiously, bank deposits were again brought under government controlduring the new, brief Peronist period which began in 1973. Thisdecision to nationalize deposits was reversed when a military juntaoverthrew the regime and seized power on March 24, 1976. What happenednext has gone down in economic history and revealed that thesystem of banking “freedom” and irresponsibility which followed wasalmost as disruptive as the system previously instituted by Perón.Again, in December 2001, Argentina had the dubious honor of illustratingeconomic theory. In this case, its fractional-reserve currency boardfailed upon an evaporation of public confidence and a subsequent, correspondingrun to withdraw dollars from bank deposits. This led MinisterCavallo to limit the amount people could withdraw weekly frombanks to 250 dollars (limit popularly known as the “corralito”) andclearly demonstrates one of the essential theoretical principles highlightedin this book: that a fractional-reserve banking system without alender of last resort is an impossibility.