The Theory of Money and Credit - Ludwig von Mises [179]
[23] See p. 229 above.
Chapter 20. Problems of Credit Policy
I. Prefatory Remark
1. The Conflict of Credit Policies (p. 367)
II. Problems of Credit Policy Before the War
2. Peel's Act. 3. The Nature of Discount Policy. 4. The Gold-Premium Policy. 5. Systems Similar to the Gold-Premium Policy. 6. The "Illegitimate" Demand for Money. 7. Other Measures.
I. Prefatory Remark
1 The Conflict of Credit Policies
Since the time of the Currency School, the policy adopted by the governments of Europe and America with regard to the issue of fiduciary media has been guided, on the whole, by the idea that it is necessary to impose some sort of restriction upon the banks in order to prevent them from extending the issue of fiduciary media in such a way as to cause a rise of prices that eventually culminates in an economic crisis. But the course of this policy has been continually broken by contrary aims. Endeavors have been made by means of credit policy to keep the rate of interest low; "cheap money" (that is, low interest) and "reasonable" (that is, high) prices have been aimed at. Since the beginning of the twentieth century these endeavors have noticeably gained in strength; during the war and for some time after it they were the prevailing aims.
The strange vicissitudes of credit policy cannot be described except by passing in review the actual tasks that it has had to solve and will have to solve in the future. Although the problems themselves may always be the same, the form they assume changes. And, for the very reason that our task is to strip them of their disguises, we must first study them in their contemporary garb. In what follows, separate consideration will be given to such problems, first, as they exhibited themselves before the war, and then, as they have exhibited themselves in the period immediately after the war. [1]
II. Problems of Credit Policy Before the War[2]
2 Peel's Act
Peel's Bank Act, and the ideas on which it was based, still sets the standard by which credit policy is ultimately governed nowadays; even those countries that do not follow the example of the English bank legislation, or do not follow it so faithfully as others, have yet not been able to withstand its influence altogether. Here we are confronted with a strange phenomenon. While the economic literature of all countries was directing the most violent and passionate attacks against the system of having a fixed quota of the note issue not backed by metal; while people were untiring in calling Peel's Act the unfortunate legislative product of a mistaken theory; while the currency principle continued to be represented as a system of erroneous hypotheses that had long been confuted; yet one legislature after another took steps to limit the issue of uncovered banknotes. And, remarkably enough, this procedure on the part of governments evoked but little censure, if any at all, from those whose views on banking theory should logically have led them most severely to condemn it. To start from the banking principle, which denies the possibility of an overissue of banknotes and regards "elasticity" as their essential characteristic, is necessarily to arrive at the conclusion that any limitation of the circulation of notes, whether they are backed by money or not, must prove injurious, since it prevents the exercise of the chief function of the note issue, the contrivance of an adjustment between the stock of money and the demand for money without changing the objective exchange value of money. It might easily have appeared desirable to Tooke's followers that provision should be made for backing that part of the note circulation that was not backed by metal; but logically they should have condemned the prescription that a certain proportion