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

460 Money, Bank Credit, and Economic Cyclesembodiment of investments which savers, or capitalists, makein the following type of transaction: Capitalists concede presentgoods to demanders of present goods, who are willing tohand over a larger quantity of future goods to savers, orlenders, in the future in exchange for the ability to use thepresent goods in production processes. These securities maytake on a wide variety of legal forms; they may be stocks,bonds, etc. In any case the stock market has the great virtue offacilitating the exchange of ownership of such securities, andhence of the corresponding capital goods of which the securitiesrepresent a share. Another main advantage of the stockmarket is that it allows the holders of securities to obtain rapidliquidity should they wish to part with them. 59 In addition itpermits economic agents to temporarily invest their excesscash on hand, which they can use to purchase securities, andthough these securities may represent long-term investments,they can be held for shorter periods and sold at any time. 6059 Another essential function of the stock market and the options andfutures market has been revealed, in accordance with the most hallowedtradition of the Austrian School, by Ludwig M. Lachmann, who states:[T]he Stock Exchange by facilitating the exchange of knowledgetends to make the expectations of large numbers of peopleconsistent with each other, at least more consistent thanthey would have been otherwise; and that through the continualrevaluation of yield streams it promotes consistent capitalchange and therefore economic progress. (Lachmann, Capitaland its Structure, p. 71; italics added)60 It is important to point out that the banking sector has largely usurpedthis important role of the stock market. Since the banking sector canexpand credit, generate deposits and pay them out, it has become a populartool for investing a temporary excess of cash. This is very harmful,as it permits an even greater increase in credit expansion, along with thenegative effects we are familiar with. However if excess cash wereplaced in the stock market, it would lead to an effective rise in voluntarysaving, which would permit the lengthening of investment processes,and no inevitable subsequent crisis would force entrepreneurs to suspendthese processes (yet savers would never have the guarantee ofreceiving the same monetary sum for their securities, should they sellthem, as they pay when they buy them). A common criticism against thestock market is that its small size and limited development make the