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

744 Money, Bank Credit, and Economic Cyclesa portion of current “deposits.” These mutual funds would behighly liquid, due to the existence of widespread secondaryfinancial markets. However, as is logical, they would notguarantee their participants the recovery at any time of thenominal value of their investments. As with the value of anyother security in the secondary market, this would be subjectto changes in the market value of the corresponding shares.Thus a sudden change (albeit improbable) in the social rate oftime preference would cause generalized fluctuations in thevalue of shares. Such oscillations in value would only affectthe holders of the corresponding shares and not, as nowoccurs, all citizens, who, year after year, see a significant dropin the purchasing power of the state-issued monetary unitsthey are obliged to use.Quite possibly, this widespread system of mutual fundswould be accompanied by an entire network of institutionsdevoted to providing their customers with such services aspayments, transfers, bookkeeping, and cashier services ingeneral. These companies would operate in an environment offree competition and would charge the corresponding marketprices for their services.Also conceivable is the appearance of a number of privatefirms with no connection whatsoever to credit, companies dedicatedto the extraction, design, and supply of the differentforms of private money. Such firms would also receive a profit(most likely a modest one) for their services. We say “extraction”because we have no doubt that in an environment ofprices of the corresponding capital goods, stocks and/or bonds. In otherwords, despite the high degree of liquidity these investments mightreach, this liquidity would neither be immediate nor would it correspondto the nominal value attached to monetary units by definition. In fact anyperson with a need for liquidity would be obliged to find someone in themarket willing to provide that liquidity by paying in gold the marketvalue of the corresponding mutual-fund shares. Hence mutual funds canguarantee neither the value of the capital invested at the time the share isacquired, nor the interest rate of the investment. Any “guarantee” of liquiditysimply refers to the relative ease with which the fund’s shares canbe sold on the market (though there is no legal guarantee that the sale willbe possible under all circumstances nor much less at a set price).