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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 771have touched on operations with an agreement of repurchaseat their nominal value; different transactions with “American”put options; so-called time “deposits,” which in practice act astrue demand deposits; and demand deposits carried outthrough the completely unrelated institution of life insurance.The specific combinations of these legal forms of business,and any other similar form or combination which might bedeveloped in the future, are easily identifiable and classifiableunder civil and criminal law, just as we proposed in the secondsection (footnote 40) of this chapter. For it is relativelyeasy for any impartial judge or observer to ascertain whetherthe essence of an operation permits the withdrawal at anytime of the funds initially deposited and whether, from a subjectiveviewpoint, human behavior shows that people regardcertain claims as money, i.e., a generally accepted medium ofexchange which is perfectly available (i.e., liquid) at all times.Moreover the creation of new businesses and “contracts”in an effort to circumvent the basic legal principles whichshould govern banking has taken place in an environment inwhich economic agents have been unable to identify theextent to which such “novelties” are illegitimate and causegreat harm to the economy and society. If from now on judicialand public authorities clearly identify the issues we analyzein this book, it will be much easier to combat the deviantbehaviors which may arise in the financial sector. It is unsurprisingthat Peel’s Act of 1844 was followed by a disproportionateexpansion of bank deposits, since at that time economictheorists had not yet established the absoluteequivalence between bank deposits and banknotes, in termsof their nature and effects. Peel’s Act did not fall short of itsobjective due to the “omnipresent” nature of fractionalreservebanking, but precisely to humans’ failure to realizethat banknotes and deposits have the same nature and producethe same economic effects. In contrast, today economictheory has provided judges with analytical tools of incalculablevalue to guide them toward the correct identification ofcriminal behaviors and the pronouncement of fair, studiedjurisprudential rulings with respect to all “doubtful” caseswhich may arise in practice.