But if banking is the cause of the business cycle, aren’t the banks also a part of
the private market economy, and can’t we
therefore say that the free market is
still the culprit, if only in the banking segment
of that free market? The answer is No,
for the banks, for one thing, would never
be able to expand credit in concert were
it not for the intervention and encouragement of government. For if banks
were truly competitive, any expansion of
credit by one bank would quickly pile up
the debts of that bank in its competitors, and its competitors would quickly call
upon the expanding bank for redemption
in cash. In short, a bank’s rivals will call
upon it for redemption in gold or cash in
the same way as do foreigners, except that
the process is much faster and would nip
any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a Central Bank
exists, essentially a governmental bank,
enjoying a monopoly of government business, and a privileged position imposed
by government over the entire banking
system. . . .
Not that the banks complain about this intervention; for it is
the establishment of central banking that makes long-term bank credit expansion
possible, since the expansion of Central
Bank notes provides added cash reserves
for the entire banking system and permits all the commercial banks to expand their credit together. Central banking
works like a cozy compulsory bank cartel
to expand the banks’ liabilities; and the
banks are now able to expand on a larger
base of cash in the form of central bank notes as well as gold.
So now we see, at last, that the business
cycle is brought about, not by any mysterious failings of the free market economy,
but quite the opposite: By systematic
intervention by government in the market process. Government intervention brings
about bank expansion and inflation, and,
when the inflation comes to an end, the
subsequent depression- adjustment comes
into play.
--Murray N. Rothbard,
Economic Depressions: Their Cause and Cure (Auburn, AL: Ludwig von Mises Institute, 2009), 26-28.
