flavianopolis

I hereby intend to show that Murray Rothbard's misunderstanding of Mises is total and that exactly the opposite is true. Mises was actually arguing that freedom in the issuance of banknotes, as understood by Cernuschi, is one thing and that free banking is, if not the opposite, something completely different.

The following is a quotation from Mises.

"It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anononymous American quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it."

What Mises actually says is that it is a mistake to consider Cernuschi's understanding of freedom in the issuance of banknotes tantamount to his own understanding of free banking. Under free banking the "overissuance of fiduciary media on the part of one bank, as has been shown above, increases the amount to be paid by the expanding bank's clients to other people, it increases concomitantly the demand for the redemption of it's money-substitutes. It thus forces the expanding bank to a restraint."

The restricting force, under free banking, is thus not that issuers of banknotes are free to issue banknotes ad libitum with the result that the public will not accept banknotes, but that an expansionist lending policy of one bank will create a deficit in the balance of payment of the clients of that bank in relation to the clients of other banks and that the ultimate medium of payment is gold.

Since Mises talks about overissuance of fiduciary media and defines fiduciary media as demand deposits and bank notes beyond gold reserves*, it is a logical conclusion that, according to Mises, the issuance of demand deposits and bank notes beyond gold reserves do not per se constitute overissuance.

Mises neither advocated the 100% reserve gold standard advocated by Rothbard, nor did Mises advocate the freedom in the issuance of banknotes ad libitum advocated by Cernuschi. Ludwig von Mises advocated a free banking system under which only gold is money proper and the issuers of fiduciary media are placed "under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract".

* Human Action, third revised version, page 433.

# posted by Flavian @ 18:35