the banks to cease inflating, or even to contract if necessary. By lowering the volume of bank reserves and/or raising reserve requirements, the federal government, in the 1920s as well as today, has had the absolute power to prevent any increase in the total volume of money and credit. It is true that the FRS has no direct control over such money creators as savings banks, savings and loan associations, and life insurance companies, but any credit the principle that not everyone in a city will wish to cross the bridge at once. But the cases are entirely different. The people crossing a bridge are simply requesting a service; they are not trying to take possession of their lawful property, as are the bank depositors. A more fitting analogy would defend embezzlers who would never have been caught if someone hadn’t fortuitously inspected the books. The crime comes when the theft or fraud is committed , not when it is finally revealed.
29Perhaps a libertarian legal system would consider “general deposit warrants” (which allow a warehouse to return any homogeneous good to the depositor) as “specific deposit warrants,” which, like bills of lading, pawn tickets, dock-warrants, etc. establish ownership to specific, earmarked objects. As Jevons stated, “It used to be held as a general rule of law, that any present grant or assign-ment of goods not in existence is without operation.” See W. Stanley Jevons, Money and the Mechanism of Exchange (London: Kegan Paul, 1905), pp. 207–12.
For an excellent discussion of the problems of a fractional-reserve money, see Amasa Walker, The Science of Wealth (3rd ed., Boston: Little, Brown, 1867), pp.
126–32, esp. pp. 139–41.
The Positive Theory of the Cycle
29
expansion from these sources could be offset by deflationary pressure upon the commercial banks. This is especially true because commercial bank deposits (1) form the monetary base for the credit extended by the other financial institutions, and (2) are the most actively circulating part of the money supply. Given the Federal Reserve System and its absolute power over the nation’s money, the federal government, since 1913, must bear the complete responsibility for any inflation. The banks cannot inflate on their own; any credit expansion can only take place with the support and acquiescence of the federal government and its Federal Reserve authorities. The banks are virtual pawns of the government, and have been since 1913. Any guilt for credit expansion and the consequent depression must be borne by the federal government and by it alone.30
PROBLEMS IN THE AUSTRIAN THEORY
OF THE TRADE CYCLE
The “Assumption” of Full Employment
Before proceeding to discuss alternative business cycle theories, several problems and time-honored misconceptions should be cleared up. Two standard misconceptions have already been refuted by Professor Mises: (1) that the Austrian theory “assumes” the previous existence of “full employment,” and therefore does not apply if the credit expansion begins while there are unemployed factors, and (2) that the theory describes the boom as a period of “overinvestment.” On the first point, the unemployed factors can either be labor or capital-goods. (There will always be unemployed, submarginal, land available.) Inflation will only put unemployed labor factors to work if their owners, though otherwise 30Some writers make a great to-do over the legal fiction that the Federal Reserve System is “owned” by its member banks. In practice, this simply means that these banks are taxed to help pay for the support of the Federal Reserve. If the private banks really “own” the Fed, then how can its officials be appointed by the government, and the “owners” compelled to “own” the Federal Reserve Board by force of government statute? The Federal Reserve Banks should simply be regarded as governmental agencies.
30
America’s Great Depression
holding out for a higher real
29Perhaps a libertarian legal system would consider “general deposit warrants” (which allow a warehouse to return any homogeneous good to the depositor) as “specific deposit warrants,” which, like bills of lading, pawn tickets, dock-warrants, etc. establish ownership to specific, earmarked objects. As Jevons stated, “It used to be held as a general rule of law, that any present grant or assign-ment of goods not in existence is without operation.” See W. Stanley Jevons, Money and the Mechanism of Exchange (London: Kegan Paul, 1905), pp. 207–12.
For an excellent discussion of the problems of a fractional-reserve money, see Amasa Walker, The Science of Wealth (3rd ed., Boston: Little, Brown, 1867), pp.
126–32, esp. pp. 139–41.
The Positive Theory of the Cycle
29
expansion from these sources could be offset by deflationary pressure upon the commercial banks. This is especially true because commercial bank deposits (1) form the monetary base for the credit extended by the other financial institutions, and (2) are the most actively circulating part of the money supply. Given the Federal Reserve System and its absolute power over the nation’s money, the federal government, since 1913, must bear the complete responsibility for any inflation. The banks cannot inflate on their own; any credit expansion can only take place with the support and acquiescence of the federal government and its Federal Reserve authorities. The banks are virtual pawns of the government, and have been since 1913. Any guilt for credit expansion and the consequent depression must be borne by the federal government and by it alone.30
PROBLEMS IN THE AUSTRIAN THEORY
OF THE TRADE CYCLE
The “Assumption” of Full Employment
Before proceeding to discuss alternative business cycle theories, several problems and time-honored misconceptions should be cleared up. Two standard misconceptions have already been refuted by Professor Mises: (1) that the Austrian theory “assumes” the previous existence of “full employment,” and therefore does not apply if the credit expansion begins while there are unemployed factors, and (2) that the theory describes the boom as a period of “overinvestment.” On the first point, the unemployed factors can either be labor or capital-goods. (There will always be unemployed, submarginal, land available.) Inflation will only put unemployed labor factors to work if their owners, though otherwise 30Some writers make a great to-do over the legal fiction that the Federal Reserve System is “owned” by its member banks. In practice, this simply means that these banks are taxed to help pay for the support of the Federal Reserve. If the private banks really “own” the Fed, then how can its officials be appointed by the government, and the “owners” compelled to “own” the Federal Reserve Board by force of government statute? The Federal Reserve Banks should simply be regarded as governmental agencies.
30
America’s Great Depression
holding out for a higher real
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