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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 807the Currency School, on the other. Many free-banking advocatesdid base their position on the fallacious, unsound inflationaryarguments of the Banking School, and most CurrencySchool theorists did plan to reach their objectives of financialsolvency and economic stability via the inception of a centralbank to curb abuses. However, from the very beginning, certainable Currency School theorists found it impossible andutopian to believe the central bank would do anything but furtheraggravate the problems that had emerged. These scholarswere aware that the best way to limit the creation of fiduciarymedia and to achieve monetary stability was through a freebankingsystem governed, like all other economic agents, bythe traditional principles of civil and commercial law (i.e., a100-percent reserve requirement on demand deposits). Paradoxically,nearly all Banking School defenders ended up cheerfullyaccepting the establishment of a central bank which, aslender of last resort, would guarantee and perpetuate theexpansionary privileges of the private banking system. Meanwhileprivate bankers sought with increasing determination toparticipate in the lucrative “business” of generating fiduciarymedia by credit expansion without having to give too muchthought to problems of liquidity, due to the support offered atall times by the central bank, the lender of last resort.Furthermore, although Currency School theorists werecorrect in almost all of their theoretical contributions, theywere unable to see that every one of the drawbacks theyrightly perceived in the freedom of private banks to issuefiduciary media in the form of banknotes were also inherent inthe “business” of granting expansionary loans againstdemand deposits at banks, though in this case the drawbackswere more concealed and surreptitious, and hence much moredangerous. These theorists also committed an error when theyclaimed the most appropriate policy would be to introducelegislation to abolish merely the freedom to issue banknotesunbacked by gold and to set up a central bank to defend themost fundamental monetary principles. Only Ludwig vonMises, who followed the tradition of Modeste, Cernuschi,Hübner, and Michaelis, was capable of realizing that the CurrencySchool’s prescription of a central bank was a mistake,and that the best and only way to uphold the school’s sound