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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 791stock-market crises and economic recessions continue to hit,though they are less serious than in the first stage. 96In the third stage, the central bank would remain independent,and a radical step would be taken in the reform: a100-percent reserve requirement would be established for privatebanks. As we pointed out at the beginning of this chapter,this step would necessitate certain legislative modificationsto the commercial and penal codes. These changeswould allow us to eradicate most of the current administrativelegislation issued by central bankers to control deposit andcredit institutions. The sole, remaining function of the centralbank would be to guarantee that the monetary supply growsat a rate equal to or slightly lower than the increase in productivityin the economic system. (As we know, MauriceAllais proposes a growth rate of around 2 percent per year.)THE IMPORTANCE OF THE THIRD AND SUBSEQUENT STAGESIN THE REFORM: THE POSSIBILITY THEY OFFER OF PAYING OFFTHE NATIONAL DEBT OR SOCIAL SECURITY PENSION LIABILITIESIn the banking industry, reform would revolve around theconcept of converting today’s private bankers into mere managersof mutual funds. Specifically, once authorities haveannounced and explained the reform to citizens, they shouldgive the holders of current demand deposits (or their equivalent)the opportunity to manifest their desire, within a prudenttime period, to replace these deposits with mutual-fundshares. (People would receive the warning that if they shouldaccept this option, they would no longer be guaranteed thenominal value of their deposits, and a need for liquiditywould oblige them to sell their shares on the stock market andtake the current price for them at the moment they sell96 José Antonio de Aguirre, in his appendix to the Spanish edition ofVera C. Smith’s book, The Rationale of Central Banking and the Free BankingAlternative (Indianapolis, Ind.: Liberty Press, 1990), explains why abroad consensus has arisen in favor of the independence of monetaryauthorities.