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

180 Money, Bank Credit, and Economic CyclesWe see that, although Bank A is justified in making thisbook entry, since it becomes owner of the monetary units andstores them in its safe without distinguishing them from others,the reference entries should only affect information ormemorandum accounts. This is due to the fact that, thoughthe ownership of the monetary units has been transferred tothe bank, it has not been completely transferred, but remainstotally restricted, in the sense that Depositor X still possessesthe full availability of the monetary units.Apart from this last observation, nothing unusual has yethappened from an economic or accounting standpoint. A Mr.X has made an irregular deposit of money in Bank A. Up tonow this contract has not resulted in any modification of thequantity of money in existence, which continues to be1,000,000 m.u. and remains available to Mr. X who, for hisown convenience, has deposited it in Bank A. Perhapsdepositing the money is convenient for Mr. X because hewishes to better safeguard his money, avoiding the dangersthat await it in his own home (theft and losses), and to receivecashier and payment services from the bank. In this way Mr.X avoids having to carry money in his pocket and can makepayments by simply writing a sum down on a check andinstructing the bank to send him a summary each month of allthe operations carried out. These banking services are all veryvaluable and warrant the decision of Mr. X to deposit hismoney in Bank A. Furthermore, Bank A is fully justified incharging the depositor for these services. Let us suppose theagreed-upon price for the services is 3 percent per year of thequantity deposited (the bank could also charge a flat rateunrelated to the amount deposited, but for the purpose ofillustration we will assume the cost of the services depends onthe entire amount deposited), a sum with which the bank cancover its operating costs and also achieve a small profit margin.If we suppose the operating costs are equivalent to 2 percentof the amount deposited, the bank will obtain a profit of1 percent per year, or 10,000 m.u. If Mr. X pays this annual fee(30,000 m.u.) in cash, the following book entries would resultfrom the rendering of the above-mentioned services: