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

186 Money, Bank Credit, and Economic Cyclesin cash as if the money were physically “in his possession,”since according to his contract it remains fully available to him.From an economic standpoint, there is no doubt the 1,000,000m.u. Mr. X deposited in Bank A continue to contribute to hiscash balances. However, when the bank appropriates 900,000m.u. from deposits and loans them to Z, it simultaneously generatesadditional purchasing power from nothing and transfersit to Z, the borrower, who receives 900,000 m.u. It is clear that,both subjectively and objectively, Z enjoys the full availabilityof 900,000 m.u. beginning at that point and that these monetaryunits are transferred to him. 9 Therefore, there has been anincrease in the amount of money in circulation in the market, due tobeliefs held simultaneously and with good reason by two differenteconomic agents: one thinks he has 1,000,000 m.u. at his disposal,and the other believes he has 900,000 m.u. at his disposal. In otherwords, the bank’s appropriation of 900,000 m.u. from a demanddeposit results in an increase equal to 900,000 m.u. in the aggregatebalances of money existing in the market. In contrast, the loan ormutuum contract covered earlier involves no such occurrence.We should also consider the location of the existingmoney in the market from the time the banker appropriatesthe deposit. The number of monetary units in the market hasclearly grown to 1,900,000, though these units exist in differentforms. We say there are 1,900,000 m.u. because differenteconomic agents subjectively believe they have at their disposal1,900,000 m.u. to exchange in the market, and moneyconsists of all generally-accepted mediums of exchange.9 Money is the only perfectly liquid asset. The bank’s failure to complywith a 100-percent reserve ratio on demand deposits brings about a seriouseconomic situation in which two people (the original depositor andthe borrower) simultaneously believe they are free to use the same perfectlyliquid sum of 900,000 m.u. It is logically impossible for two peopleto simultaneously own (or have fully available to them) the sameperfectly liquid good (money). This is the fundamental economic argumentbehind the legal impracticability of the monetary irregular-depositcontract with fractional reserves. It also explains that when this “legalaberration” (in the words of Clemente de Diego) is imposed by the state(in the form of a privilege—ius privilegium—given to the bank), it entailsthe creation of new money (900,000 m.u.).