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 numerous 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 the issue of fiduciary media.

• 11See above, pp. 313 f.