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

Central and Free Banking Theory 711eliminating from the corresponding instruments an importantcharacteristic of money: perfect, i.e., immediate, complete, andnever conditional, liquidity. Thus not only would depositorsbecome forced lenders at the will of the banker, but a depositwould become a type of aleatory contract or lottery, in whichthe possibility of withdrawing the cash deposited woulddepend on the particular circumstances of each moment.There can be no objection to the voluntary decision of certainparties to enter into such an atypical aleatory contract as thatmentioned above. However, even if a “safeguard” clause wereintroduced and participants (bankers and their customers)of the notes banks had issued. Thus, in reference to bank runs, Selginstates:Banks in a free banking system might however avoid such afate by issuing liabilities contractually subject to a ‘restriction’of base money payments. By restricting payments banks caninsulate the money stock and other nominal magnitudes frompanic-related effects. (Selgin, “Free Banking and MonetaryControl,” p. 1455)The fact that Selgin considers resorting to such clauses to avoid bankruns is as significant in terms of the “solvency” of his own theory as itis surprising from a legal perspective that the attempt is made to base asystem on the expropriation, albeit partial and temporary, of the propertyrights of depositors and note holders, who, in a crisis, would betransformed into forced lenders and would no longer be considered truedepositors and holders of monetary units, or more specifically, perfectmoney substitutes. Let us remember a comment from Adam Smith himself:The directors of some of those [Scottish] banks sometimestook advantage of this optional clause, and sometimes threatenedthose who demanded gold and silver in exchange for aconsiderable number of their notes, that they would takeadvantage of it, unless such demanders would content themselveswith a part of what they demanded. (Smith, An Inquiryinto the Nature and Causes of the Wealth of Nations, Book II,chap. 2, pp. 394–95)On option clauses, see Parth J. Shah, “The Option Clause in Free BankingTheory and History: A Reappraisal,” a manuscript presented at the2nd Austrian Scholars Conference (Auburn, Ala.: Ludwig von MisesInstitute, April 4–5, 1997), later printed in the Review of Austrian Economics10, no. 2 (1997): 1–25.