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

584 Money, Bank Credit, and Economic Cycles6APPENDIX ON LIFE INSURANCE COMPANIESAND OTHER NON-BANK FINANCIAL INTERMEDIARIESThe analysis of the last four chapters has put us in a positionto understand the important role true financial intermediariesplay in the economy. Logically, we use the term true todescribe those non-bank financial intermediaries which createex nihilo neither loans nor the corresponding deposits, andwhich merely act as middlemen in the market in which presentgoods are exchanged for future goods. In other words,financial intermediaries simply take money from lendersoffering present goods and hand it over to borrowers. Inreturn for their service as mere intermediaries they receive aprofit, which is generally small. This slender profit margincontrasts with the disproportionate gains the aggregate ofbanks accumulate when they create money ex nihilo in theform of deposits, an activity they pursue thanks to the legalprivilege which permits them to make self-interested use ofmost of the money deposited with them on demand.Although with tiresome insistence banks are claimed to bethe most important financial “intermediaries” in the economy,this is a baseless, unrealistic notion. Banks are essentially notfinancial intermediaries. Their main activity consists of creatingloans and deposits from nothing (and is apart from theirfunction as true financial intermediaries, a role of secondaryimportance, both quantitatively and qualitatively speaking).103 In fact banks and the banking system have not takenand Monetary Stability,” printed in Cato Journal 3, no. 1[Spring, 1983]: 163–70, esp. p. 169)In chapter 9 we suggest a process for reforming the monetary andbanking system. Upon its culmination, this process would obviate theneed to design and implement any more “macroeconomic policies.”103 Luis Ángel Rojo has correctly pointed out that banks’ central activitydoes not involve their function as financial intermediaries, but theirability to create loans and deposits from nothing. However he still refersto banks as financial “intermediaries” and overlooks the prominent roletrue financial intermediaries (which he describes as “non-bank”) would