The Theory of Money and Credit - Ludwig von Mises [159]
It is true that the investment of its assets in short-term loans does make it possible for a bank to satisfy its creditors within a certain comparatively short period. But this would prove adequate in the face of a loss of confidence only if the holders of notes and deposits did not apply simultaneously to the bank for immediate payment of the sums of money owing to them. Such a supposition is not very probable. Either there is no lack of confidence at all or it is general. There is only one way in which liquidity of status might be at least formally secured with regard to the special circumstances of credit-issuing banks. If such banks made loans only on the condition that they had the right to demand repayment at any time, then the problem of liquidity would of course be solved for them in a simple manner. But from the point of view of the community as a whole, this is of course no solution, but only a shelving, of the problem. The status of the bank could only apparently be kept liquid at the expense of the status of those who borrowed from it, for these would be faced with precisely the same insurmountable difficulty. The banks' debtors would not have kept the borrowed sums in their safes, but would have put them into productive investments from which they certainly could not withdraw them without delay. The problem is thus in no way altered; it remains insoluble.
6 The Significance of Short-Term Cover
Credit-issuing banks as a rule give preference to short-term loans as investments. Often the law compels them to do this, but in any case they would be forced to do it by public opinion. But the significance of this preference has nothing to do with the greater ease with which it is generally, but erroneously, supposed to allow the fiduciary media to be redeemed. It is true that it is a policy that has preserved the bank-credit system in the past from severe shocks; it is true that its neglect has always avenged itself; and it is true that it still is important for the present and future; but the reasons for this are entirely different from those which the champions of short-term cover are in the habit of putting forward.
One of its reasons, and the less weighty, is that it is easier to judge the soundness of investments made in the form of short-term loans than that of long-term investments. It is true that there are numer ous long-term investments that are sounder than very many short-term investments; nevertheless, the soundness of an investment can as a rule be judged with greater certainty when all that has to be done is to survey the circumstances of the market in general and of the borrower in particular for the next few weeks or months, than when it is a matter of years or decades.
The second and decisive reason has already been mentioned. [11] If the granting of credit through the issue of fiduciary media is restricted to loans that are to be paid back after a short space of time, then there is a certain limitation of the amount of the issue of fiduciary media. The rule that it is desirable for credit-issuing banks to grant only short-term loans is the outcome of centuries of experience. It has been its fate always to be misunderstood; but even so, obedience to it has had the important effect of helping to limit