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

802 Money, Bank Credit, and Economic CyclesThe fifth and last stage in the privatization of the financialand banking system would begin when the conditions of goldproduction and distribution had stabilized. This last stagewould be characterized by absolute freedom in banking(though the system would be subject to legal principles, andhence, a 100-percent reserve requirement on demanddeposits) and the existence of a single, worldwide gold standardwith a 100-percent reserve ratio in an environment ofslight, gradual “deflation” and sustained economic growth. Atany rate, the evolutionary process of experimentation in thefield of money and finance would continue, and it is impossibleto predict whether gold would continue to be the currencychosen by the market as a medium of exchange, or whetherfuture changes in social conditions would spontaneously,through a process of evolution, give rise to the emergence ofan alternative standard.In this fifth and last stage, in which a single gold standardwould spread throughout the world, it would be advisable forthe different countries to arrive at an international agreementdesigned to prevent the transition from having any unnecessary,real effects (apart from the initial, inflationary shockwhich would be unavoidable, since the jump in the value ofgold would trigger an increased influx of the metal into themarket). Such an agreement would stipulate the prior creationof a structure of fixed exchange rates between all currencies.This would make it possible to uniformly assess the entireworld supply of fiduciary media and to redistribute amongthe economic agents and private banks of the different countriesthe stocks of gold held by the world’s central banks. Thisredistribution would be carried out in exact proportion to thesum of deposits and bills in each.the system from becoming all too rigid. (Hayek, MonetaryNationalism and International Stability, p. 82)In any case, the initial inflationary shock could be reduced if, during theyears prior to the transition to the fifth stage, central banks were to injecttheir 2 percent increase in the money supply in the form of open-marketpurchases of gold.