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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 797move would eliminate a large number (or even all) of thebonds issued by the government, which would benefit all citizens,since from that point on they would no longer have topay taxes to finance the interest payments on the debt. Furthermorethe current holders of treasury bonds would not beadversely affected, since their fixed-income securities wouldbe replaced by mutual-fund shares which, from the time ofthe reform, would have a recognized market value and a rateof return. 102 Moreover there are other government liabilities(for example, in the area of state social-security pensions)which could be converted into bonds and might also beexchanged for shares in the new mutual funds, either insteadof or in addition to treasury bonds, and with highly beneficialeconomic effects.Chart IX-2 shows a breakdown of the different accountingassets and liabilities which would appear on the consolidatedbalance sheet for the banking system once all bank depositsfunds. This goal would require that these funds be created and placedon the market some time before the exchange occurs (especially consideringthe number of depositors who may first opt to become shareholdersand cease to be depositors).102 For example, in Spain, in 1997, demand deposits and equivalentstotaled sixty trillion pesetas (around 60 percent of GNP), and outstandingtreasury bonds in the hands of individuals added up to approximatelyforty trillion. Therefore the exchange we propose could be carriedout with no major trauma, and it would permit the repayment of alltreasury bonds at one time without placing the holders of them at a disadvantagenor producing unnecessary inflationary tensions. At thesame time, we must remember that banks hold a large percentage of alllive treasury bonds, and hence in their case, instead of an exchange, asimple cancellation would be made in the account books. The differencebetween the sixty trillion pesetas in demand deposits and equivalentswhich would be backed by a 100 percent reserve and the forty trillionpesetas in treasury bonds could be used for a similar, partial exchangeinvolving other financial, government liabilities (in the area of statesocial-security pensions, for example). In any case, the sum available forthis type of exchange would be that remaining after subtracting theamounts corresponding to those deposit-holders who had freelydecided to convert their deposits into shares of equal value in the abovemutual funds.