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

188 Money, Bank Credit, and Economic Cyclesbank’s reserves (fiduciary media) is also called a secondarydeposit or derivative deposit. 11Once banks had violated the legal principle that no one mayappropriate a deposit made with them for safekeeping, and hadceased to guard 100 percent of the tantundem, it was natural forthem to try to justify their activity and defend themselves withthe argument that they had actually received the money as if itwere a loan. In fact, if a banker considers the money received aloan, then there is nothing improper in his conduct, and fromthe economic and accounting viewpoint described in the previoussection, he is only playing the legitimate, necessary role ofintermediary between lenders and borrowers. Nonetheless, anessential difference arises here: the money is not handed over tothe bank as a loan, but as a deposit. In other words, when Mr. Xmade his deposit, he did not have the slightest intention ofrelinquishing the availability of present goods in exchange for asomewhat higher figure (considering interest) of future goods.Instead, his only desire was to improve the custody and safekeepingof his money and to receive other peripheral services(cashier and bookkeeping services), while at all times retainingthe full, unaltered availability of the tantundem. This absence ofan exchange of present goods for future goods is precisely what11 This terminology has become the most widespread, as a result ofChester Arthur Phillips’s now classic work. Phillips states:a primary deposit is one growing out of a lodgement of cashor its equivalent and not out of credit extended by the bank inquestion . . . derivative deposits have their origins in loansextended to depositors . . . they arise directly from a loan, orare accumulated by a borrower in anticipation of the repaymentof a loan. (Bank Credit: A Study of the Principles and FactorsUnderlying Advances Made by Banks to Borrowers [NewYork: Macmillan, (1920) 1931], pp. 34 and 40)Nonetheless, we have a small objection to Phillips’s definition of “derivativedeposits” as deposits originating from loans. Though loans aretheir most common source, derivative deposits are created the verymoment the bank uses, either for granting loans or any other purpose, aportion of the deposits received, converting them ipso facto into fiduciarymedia or derivative deposits. On this topic, see Richard H. Timberlake,“A Reassessment of C.A. Phillips’s Theory of Bank Credit,” Historyof Political Economy 20 no. 2 (1988): 299–308.