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

192 Money, Bank Credit, and Economic CyclesThough private bankers may often be unaware that theirability to create new money ex nihilo (by using customers’deposits to grant loans) constitutes a source of huge profits, andalthough they may naively believe they are merely loaning a partof what they receive, the majority of their profits still derive froma general process in which they are immersed and the implicationsof which they do not completely comprehend. We will seethis point confirmed later when we study the effects of fractionalreservebanking in terms of the entire banking system. One thingbankers understand perfectly, however, is that by loaning most ofthe funds clients deposit, they make a much larger profit thanthey would if they acted only as legitimate intermediariesbetween lenders and borrowers—entries (1) to (6)—or as mereproviders of bookkeeping and cashier services—entries (8) and(9). In fact on the loan made to Z, Bank A will earn, for instance,an interest rate of 15 percent of the amount of the loan (900.000m.u.); that is, 135,000 m.u. The entry is as follows:Bank A(13) Debit Credit135,000 Cash Revenue from intereston loans 135,000invested a part of its capital in this manner . . . the issuer offiduciary media may, however, regard the value of the fiduciarymedia put into circulation as an addition to his income or capital.If he does this he will not take the trouble to cover theincrease in his obligations due to the issue by setting aside aspecial credit fund out of his capital. He will pocket the profitsof the issue, which in the case of token coinage is calledseigniorage, as composedly as any other sort of income.(Mises, The Theory of Money and Credit, p. 312; italics added)In light of these considerations, it is not surprising that of all economicinstitutions, banks generally display to the public the most spectacular,luxurious buildings and spend the most disproportionate amount onoffices, payroll, etc. It is no less surprising that governments have been thefirst to take advantage of banks’ great power to create money.