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

798 Money, Bank Credit, and Economic Cycleshad been backed by a 100 percent reserve and mutual fundshad been created with the system’s assets. From that point on,banks’ activities would simply consist of managing the mutualfunds created with their assets, and bankers could obtain newloans (in the form of new shares in these funds) and investthem, while charging a small percentage as a fee for the managementof this type of operation. Bankers could also continueto engage in the other (legitimate) activities they had alwayspursued in the past (the performance of payment, cashier andbookkeeping services, transfers, etc.), and they could charge thecorresponding market prices for these services.In any case, international cooperation (and fixed, butrevisable exchange rates) would continue in this third stage,and once deposits were backed with a 100 percent reserve,credit expansion would completely disappear. As we haveindicated, the central bank would be limited to increasing thesize of the money supply by a small percentage and using thisincrease to finance a portion of state expenditures, as MauriceAllais proposes. 103 In no case would this new money be usedto make open-market purchases or directly expand credit,activities rampant in Argentina’s failed attempt at bankingreform under General Perón. The reforms described abovewould lead to the almost complete elimination of stock-marketcrises and economic recessions. Beginning at that point,the behavior of savers and investors in the market would bevery closely coordinated.The establishment of a 100-percent reserve requirement isa necessary condition for the definitive abolition of the central103 Maurice Allais demands not only that monetary growth be used tofinance the current expenditures of the state (which would reduce directtaxes; specifically, income taxes), but also that deposit banking (with a100-percent reserve ratio) be radically separated from investment banking,which involves loaning to third parties money the bank has firstbeen loaned by its customers. See Allais, “Les conditions monétairesd’une économie de marchés.” A detailed examination of the transitionmeasures Maurice Allais suggests appears on pp. 319–20 of the book,L’Impôt sur le capital et la réforme monétaire. The separation betweendeposit banking and investment banking is also defended by Hayek inhis work, Denationalisation of Money.