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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 805would preclude monetary interference and manipulation onthe part of each member country and oblige those countrieswith more rigid economic structures (Germany and France,for example) to introduce the flexibility they need to competein an environment in which resorting to inflationary nationalmonetary policies to compensate for structural rigidities is nolonger an option.Some very similar thoughts could be applied to the necessaryestablishment of a financial and banking system in theeconomies of the former Eastern bloc. While we must recognizethat these economies start from a highly unfavorableposition after decades of central planning, the present transitiontoward a market economy offers a unique and cruciallyimportant opportunity to avoid the major errors committed inthe West up to now and to advance directly to at least the thirdor fourth stage in our reform plan. At the same time, a jumpstraight to the fourth stage would be quite feasible in the formerSoviet Union, where abundant gold reserves would permitthe establishment of a pure gold standard, a measure whichwould benefit the nation a great deal. At any rate, if these countriesfail to learn from the experience of others and attempt, inawkward imitation of the West, to set up a fractional-reservebanking system directed by a central bank, the financial pressuresof each moment will lead to policies of rampant creditexpansion and enormous harm to the productive structure.Such policies will foster feverish speculation and create a climateof social unrest which might even endanger the overalltransition of these societies to a full-fledged market economy.109109 In chapter 6 (footnote 110), we referred to the severe banking criseswhich have already erupted in Russia, the Czech Republic, Romania,Albania, Latvia, and Lithuania due to the disregard shown by thesecountries for recommendations like the ones we make in the text. SeeRichard Layard and Andrea Richter, “Who Gains and Who Loses fromRussian Credit Expansion?” Communist Economies and Economic Transformation6, no. 4 (1994): 459–72. On the different issues which interferewith plans for monetary reform in ex-communist countries, see, amongother sources, The Cato Journal 12, no. 3 (Winter, 1993). See also the work