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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 811In short, the essential goal of monetary policy should beto subject banks to the traditional principles of civil and commerciallaw, according to which each individual and companymust fulfill certain obligations (100-percent reserverequirement) in strict keeping with the terms agreed to in eachcontract.At the same time, we should be strongly critical of most ofthe literature which, following the publication in the late seventiesof Hayek’s book, Denationalization of Money, hasdefended a model of fractional-reserve free banking. The mostimportant conclusion to draw from all of this literature is thatits authors too often fail to realize that they frequently committhe old errors of the Banking School. As we explained in chapter8, this is true of the works of White, Selgin, and Dowd.There is nothing wrong with their attention to the advantagesof an interbank clearing system in terms of self-control incredit expansion, and in this sense their system would producebetter results than the current central-banking system, asLudwig von Mises originally pointed out. However fractional-reservefree banking is still a second best which wouldnot keep a wave of excessive optimism in loan concessionfrom triggering the joint action of different banks. At any rate,these authors fail to see that as long as the fractional-reserveprivilege remains, it will be impossible in practice to dispensewith the central bank. In brief, as we have argued in this book,the only way to eliminate the central planning agency in thefield of banking and credit (the central bank) is to do awaywith the fractional-reserve privilege private bankers currentlyenjoy. This is a necessary measure, though it is not sufficient:the central bank must still be completely abolished and thefiduciary money it has created up to now must be privatized.In conclusion, if we wish to build a truly stable financialand monetary system for the twenty-first century, a systemwhich will protect our economies as far as humanly possiblefrom crises and recessions, we will have to: (1) ensure completefreedom of choice in currency, based on a metallic standard(gold) which would replace all fiduciary media issued inthe past; (2) establish a free-banking system; and, most importantly,(3) insist that all agents involved in the free-banking