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

792 Money, Bank Credit, and Economic Cyclesthem). 97 Each depositor to select this option would receive anumber of shares strictly proportional to the sum of hisdeposits with respect to the total deposits at each bank. Eachbank would transfer its assets to a mutual fund which wouldencompass all of the bank’s wealth and claims (except for,basically, the portion corresponding to its net worth).After the period during which deposit holders mayexpress a wish to continue as such or instead to acquire sharesin the mutual funds to be constituted following the reform, thecentral bank, as Frank H. Knight recommends, 98 should printlegal bills for an overall amount equal to the aggregate of alldemand deposits and equivalents recorded on the balancesheets of all the banks under its control (excluding the sumrepresented by the above exchange option). Clearly the central97 A depositor at a bank is a holder of “money” inasmuch as he wouldbe willing to keep his deposits at the bank even if they bore no interest.The fact that in fractional-reserve banking systems deposits have beenconfused with loans makes it advisable, in our view, to give depositorsthe chance to exchange deposits, within a reasonable time period, forshares in the mutual funds to be constituted with the bank’s assets. Inthis way it would become clear which deposits are subjectivelyregarded as money and which are seen as true loans to banks (involvinga temporary loss of availability). Also, massive, disturbing and unnecessarytransfers from deposits to mutual fund shares once the reform iscomplete would be prevented. As Ludwig von Mises points out,The deposits subject to cheques have a different purpose[than the credits loaned to banks]. They are the businessman’s cash like coins and bank notes. The depositor intendsto dispose of them day by day. He does not demand interest, orat least he would entrust the money to the bank even withoutinterest. (Mises, Money, Method and the Market Process, p. 108;italics added)98 The necessary reserve funds will be created by printing papermoney and putting it in the hands of the banks which needreserves by simple gift. Even so, of course, the printing of thispaper would be non-inflationary, since it would be immobilizedby the increased reserve requirements. (Hart, “‘TheChicago Plan’ of Banking Reform,” pp. 105–06, and footnote1 on p. 106, where Hart attributes this proposal to Frank H.Knight)