Money, Bank Credit, and Economic Cycles by Unknown

Author:Unknown
Language: eng
Format: epub

Each time a new crisis hits, a complete set of new laws or amendments to prior ones is swiftly enacted under the naive assumption that the former laws were insufficient and that the new, more detailed and all-encompassing ones will better avoid future crises. This is how the government and the central bank excuse their unfortunate inability to avert crises, which nevertheless arise again and again, and the new regulations last only until the next bank crisis and economic recession.100

Therefore we can conclude that banking legislation is condemned to failure and will continue to be so unless the present form is thoroughly abolished and replaced by a few simple articles to be included in the commercial and penal codes. These articles would establish the regulation of the monetary bank-deposit contract according to traditional legal principles (a 100-percent reserve requirement) and would prohibit all contracts which mask fractional-reserve banking. In short, in keeping with Mises's view, the above proposal entails the substitution of several clear, simple articles, to appear in the commercial and penal codes, for the current web of administrative banking legislation, which has not achieved the objectives set for it.101

It is interesting to note that modern defenders of fractional-reserve free banking wrongly believe, due in part to their lack of legal preparation, that a 100-percent reserve requirement would amount to an unfair administrative restriction of individual freedom. Nevertheless, as the analysis of the first three chapters shows, nothing could be further from the truth. For these theorists do not realize that such a rule, far from being an example of systematic, administrative government coercion, merely constitutes the recognition of traditional property rights in the banking sector. In other words, theorists who endorse a fractional-reserve free-banking system, which would infringe traditional legal principles, fail to see that “free trade in banking is synonymous with free trade in swindling,” a famous phrase attributed to an anonymous American and reiterated by Tooke.102 Moreover if a free-banking system must ultimately be defended as a “lesser evil” in comparison with central banking, the motive should not be to permit the exploitation of the lucrative possibilities which always arise from credit expansion. Instead free banking should be seen as an indirect route to the ideal free-banking system, one subject to legal principles, i.e., a 100-percent reserve requirement. All legal means available in a constitutional state should be applied at all times in the direct pursuit of this goal.

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