Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Attempts to Legally Justify Fractional-Reserve Banking 157TRANSACTIONS WITH A REPURCHASE AGREEMENTWhenever we observe, as in the monetary deposit, that theimmediate availability of the good is offered to customers inorder to attract their funds 40 and then invest their money oremploy it in private transactions, etc., we should be on ourguard, irrespective of the legal appearance of the transaction.For example, in certain contracts with a repurchase agreement,one of the parties commits to repurchase from the other,whenever requested by the second party, a security, right orfinancial asset at a prefixed price at least equal to that originallypaid for the good. The intention in these cases, againstlegal principles, is to conceal a true monetary irregular-depositcontract, in which one of the contracting parties pursues theessential objective of guaranteeing the immediate availabilityof the good, and the other pursues the familiar, contradictorypurpose or cause of gathering monetary resources to investthem in different business deals. In short, these are often evenfraudulent transactions, in which the professional deposit“gatherer” tries to convince his “customers” to turn over theiravailable assets easily and without a heavy commitment, inexchange for the fundamental promise that their money willremain available to them and be returned to them wheneverthey desire (via the “repurchase agreement”).We observe a similar case when, as often happens more orless explicitly in practice, an institution (for example, a bank)attempts to systematically maintain or “conserve” the marketvalue of its stocks by carrying out a series of financial operationsto indicate to the market that the sale of the stocks is“guaranteed” at a set price. If this is true, and to the extent thatthe general public believes it, we witness another transactionin which a monetary irregular-deposit contract is ultimatelyorchestrated via investment in securities, stocks or bonds40 Many “irregular” transactions are accompanied by the “guarantee” ofcontinuous availability to persuade the customer that there is no need torelinquish it nor make the sacrifice required by lending. This practicemakes attracting funds much easier, especially when the customer isnaïve and can be tempted (as in any sham or swindle) with the possibilityof obtaining high profits with no sacrifice nor risk.