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

158 Money, Bank Credit, and Economic Cycleswhose liquidity on the market is implicitly “guaranteed” at alltimes by a trustworthy institution. 41 Therefore, it is not surprisingthat many bank crises have arisen more from the massivesale of bank stocks than from a widespread withdrawal ofdeposits. These stocks were supposed to constitute a saferefuge for money while nearly guaranteeing its immediateavailability. When the bank’s solvency comes into question, itssecurities are the first to be sold on a massive scale, renderingthe bank unable to continue honoring its implicit commitmentto maintain the market value of the stocks. At least in the past,these massive sales have resulted from the fact that the indiscriminateassistance supplied by central banks to privatebanks in times of need has not reached the point of continualpreservation of shares’ current market price. The most recentbank crises in Spain and other countries have demonstratedthat ultimately, the only “depositors” to lose out have been thestockholders themselves.There are many other “borderline” cases. For example,some finance and holding companies, to encourage the subscriptionof their stocks, “commit” to repurchase them at theoriginal price whenever requested by the shareholder. In general,we should be suspicious of any transaction with a repurchaseagreement in which the price of the repurchase is fixedand is not the current price of the item on the corresponding secondarymarket. 42 Hence, it falls to the jurist and the economist to41 If we carry this line of reasoning to extremes, the entire stock marketcould be viewed as an orchestrator of true deposits if the state were toat all times guarantee the creation of the liquidity necessary to maintainstock market indexes. For reasons of public image, governments andcentral banks have insisted on pursuing this objective and policy at leastoccasionally, during many stock market crises.42 Another example of a simulated deposit is a temporary assignmentwith an agreement of repurchase on demand. This transaction is conductedas a loan from customer to bank: Collateral is offered in the formof securities, normally national bond certificates, in case of noncomplianceby the depositary. The loan bears interest at an agreed-upon rate upuntil a specified date and is repayable at the simple request of the“lender” prior to that date. If he exercises this option of early cancellation,the resulting amount to be paid him is calculated by compounding