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

808 Money, Bank Credit, and Economic Cyclesmonetary principles was through a free-banking system subjectwithout privileges to private law (i.e., with a 100-percentreserve requirement).The failure of most Currency School theorists was fatal.These theorists were responsible for the fact that Peel’s Act of1844, despite the honorable intentions behind it, failed to eliminatethe creation of fiduciary deposits, though it prohibitedthe issuance of unbacked banknotes. Moreover members ofthe Currency School also defended the institution of a centralbankingsystem which, mainly due to the negative influenceof Banking School theorists, would eventually be used to justifyand promote policies of monetary recklessness and financialexcess, policies much more foolish than those theoristsoriginally sought to remedy.Therefore the central bank, understood as a central planningagency in the field of money and banking, cannot be considereda natural product of the evolution of the free market.On the contrary, it has been dictatorially imposed from the outsideas a result of governments’ attempts to profit from thehighly lucrative possibilities of fractional-reserve banking. Infact governments have deviated from their essential role, asthey have ceased to adequately define and defend the propertyrights of bank depositors, and they have taken advantage ofthe practically unlimited possibilities of money and credit creationwhich the establishment of a fractional-reserve ratio (onbills and deposits) has opened up for them. Thus in the violationof the private-property-law principles which apply todemand deposits, governments have largely found theirlonged-for philosopher’s stone, which has provided them withunlimited financing without requiring them to resort to taxes.The construction of a true free-banking system must coincidewith the reestablishment of a 100-percent reserve requirementon amounts received as demand deposits. The originalneglect of this obligation led to all the banking and monetaryissues which have given rise to the current financial system,with its high level of government intervention.The idea is ultimately to apply a seminal idea of Hayek’sto the field of money and banking. According to this idea,