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

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Attempts to Legally Justify Fractional-Reserve Banking 159employ their analytical judgment in the study of this economic-financialtransaction and to decide exactly what type ofoperation it is, its true nature and its consequences, in light ofthe legal principles examined in these first three chapters andthe economic implications we will now consider. 43 Furthermore,this analysis would acquire vital importance if one dayin the future the existent financial system based on themonopoly of a public central bank were ever completely privatizedand a free-banking system subject to general legalprinciples were established. In this case, the current tangledweb of administrative banking regulations would be replacedthe interest on the original amount at the agreed-upon rate up until thedate he exercises the option. For the client, this operation is identical toa loan backed by securities, combined with an American option. Anoption is an agreement conferring the right, not the obligation, to buy orsell a certain quantity of an asset on a particular date or up until a particulardate. An option to purchase is a call option, and an option to sell,a put option. If the right granted lasts until a specified date, the optionis called an “American” option; if it refers to a particular date, a “European”option. The acquirer of the right compensates the other party viathe payment of a premium at the moment the contract is finalized. Theclient will exercise his option only if the interest rates paid on new timedeposits maturing at the same time as his exceed the rate he originallynegotiated. He will not exercise the option if interest rates fall, even if heneeds the liquidity, because he will normally be able to take out a loan forthe remainder of the term at a lower rate of interest and provide the bondcertificates as collateral. Some institutions even offer these contractsaccompanied by the cashier services typical of checking accounts, so thecustomer can issue checks and pay bills by direct debiting. Banks use thiscontract as a way to speculate with securities, since the public financesthem and banks keep the profits. We are grateful to Professor RubenManso for providing us with some details of this type of operation.43 Another interesting question is how to determine in practice whentime “deposits” (loans) with a very short term become true deposits.Although the general rule is clear (the subjective intention of the partiesmust prevail, and upon maturity all loans become deposits requiring a100-percent reserve until withdrawn), for practical purposes a temporarylimit is often needed (a month? a week? a day?), under which loansgranted to the bank should be regarded as actual deposits. As for the socalledsecondary medium of exchange, which are not money but can beconverted into cash very easily, meriting an additional premium fortheir purchase on the market, see Mises, Human Action, pp. 464–67.
160 Money, Bank Credit, and Economic Cyclesby a few clear, simple rules included in the Civil, Commercialand Penal Codes. The main purpose of these rules would be toguarantee adherence to the strict safekeeping principle (100-percent reserve requirement) regarding not only monetarydemand-deposit contracts, but also any other economic-financialtransaction in which the chief goal of the participants is toobtain custody and safekeeping for their deposits. In this (fornow) hypothetical situation, the analysis we are proposingwould greatly assist judges and jurists in making sense of therich, extremely complex variety of contracts and transactionsconstantly emerging in the economic-financial world andwould allow them to determine when to classify these transactionsas null and void and/or criminal according to generalcivil and penal provisions. 44At any rate, we should avoid a selfishly defeatist attitudecommon in the financial sector. It is based on the belief thathuman ingenuity will be capable of finding ever more sophisticatedmeans of fraudulently evading universal legal principlesand that therefore in practice they will never be obeyed anddefended. We should avoid this defeatist posture, because theproliferation of ingenious ways to violate these principles stemsprecisely from the fact that public authorities have alwaysdefined and defended them in an extremely confusing, ambiguousand contradictory manner, and as a result there is no generalawareness of the importance of respecting them. Quite theopposite is true. The prevailing values and ideas have over timebecome so corrupted that now people consider the irregulardeposit contract with a fractional reserve to be legitimate. Ifgeneral legal principles were again understood and respected,the number of irregular behaviors would decrease significantly(especially if public authorities really took care to preserve anddefend the corresponding property rights). At the same time,the proven fact that human ingenuity continually searches for44 In the model we propose (and which we will consider in greater detailin the last chapter), the control exerted in the financial sphere by the centralbank and its officials would be replaced by that of judges, whowould recover their full authority and central role in the application ofgeneral legal principles in the financial area as well.
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MONEY,BANK CREDIT,ANDECONOMIC CYCLE
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CONTENTSPREFACE TO THE THIRD ENGLIS
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xiiMoney, Bank Credit, and Economic
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xivMoney, Bank Credit, and Economic
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xviMoney, Bank Credit, and Economic
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xviiiMoney, Bank Credit, and Econom
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PREFACE TO THESECOND ENGLISH EDITIO
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PREFACE TOTHE THIRDSPANISH EDITIONI
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Preface to the Third Spanish Editio
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xliiMoney, Bank Credit, and Economi
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INTRODUCTIONThe economic analysis o
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Introductionxlviiand foreign exchan
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IntroductionxlixThis book comprises
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Introductionrecurrent phenomenon. I
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Introductionand Professors Hans-Her
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100 Money, Bank Credit, and Economi
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6ADDITIONALCONSIDERATIONSON THE THE
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7A CRITIQUE OFMONETARIST ANDKEYNESI
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A Critique of Monetarist and Keynes
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8CENTRAL AND FREEBANKING THEORYThis
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9A PROPOSAL FOR BANKINGREFORM: THE
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BIBLIOGRAPHYAbrams, M.A., Money in
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Bibliography 815Bajo Fernández, M.
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Bibliography 817Borch, K.H., Econom
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Bibliography 819Coronel de Palma, L
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Bibliography 821N. Durlauf and Lawr
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Bibliography 823Galiani, F., Della
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Bibliography 825Graham, F.D., “Pa
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Bibliography 827——, Prices and
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Bibliography 829translation by N. K
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Bibliography 831——, “Keynes
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Bibliography 833Russian edition by
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Bibliography 835Keeler, J., “Empi
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Bibliography 837——, “On Crisi
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Bibliography 839——, “Professo
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Bibliography 841Miller, H.E., Banki
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Bibliography 843Neira, Alonzo, M.A.
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Bibliography 845Raguet, C., “Repo
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Bibliography 847——, “The Myth
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Bibliography 849——, “Banking
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Bibliography 851M.C. Marcuzzo (Chel
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Bibliography 853——, “A Critiq
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Bibliography 855Walker, A., The Sci
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INDEX OF SUBJECTSAccelerator princi
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Index of Subjects 859Banking reform
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Index of Subjects 861objection to t
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Index of Subjects 863Goal, concept
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Index of Subjects 865See also Fract
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Index of Subjects 867Plan, definiti
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Index of Subjects 869Tragedy of the
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