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

196 Money, Bank Credit, and Economic Cycles900,000 m.u., it simultaneously generates deposits ex nihilo forthe sum of 900,000 m.u. In other words, the bank places at thedisposal of the borrower up to 900,000 m.u., which raises thebalance of demand deposits to 1,900,000 m.u. Of this amount,1,000,000 m.u. correspond to physical monetary units; that is,to primary deposits. The other 900,000 m.u. reflect fiduciarymedia created from nothing; in other words, derivative or secondarydeposits.If we again suppose for the sake of argument that thebanker regards as a loan the money placed with him ondemand deposit, then because this loan derives from a monetaryirregular-deposit contract, which by definition stipulatesno term for the return of the money (as it is “on demand”), the“loan” in question would clearly have no term. Furthermore,if the depositors trust the bank, the banker will rightly expectthem to withdraw only a small fraction of their deposits undernormal conditions. As a result, even though the “loan” he hassupposedly received from his depositors is “on demand,” thebanker may with good reason consider it a “loan” he will neverhave to return, since it ultimately lacks a term. Obviously if thebanker receives a loan believing he will never have to return it(and in most cases he does not even have to pay interest on it,though this is not fundamental to our argument), then ratherthan a loan, we are dealing with a de facto gift the banker giveshimself and charges to the funds of his depositors. Thismeans that although for accounting purposes the bank recognizesa debt (parallel to the loan granted) in the form of“demand deposits” (derivative or secondary deposits for thesum of 900,000 m.u.), under ordinary circumstances what thebank actually does is to create from nothing a perennialsource of financing which the banker supposes he will neverhave to return. Therefore, despite the impression the accountbooks give, the banker ultimately appropriates these fundsand considers them his property. In short, banks amasstremendous wealth, mainly by generating means of paymentto the detriment of third parties. The harm done is very generalizedand diluted, however, and takes the form of a gradualrelative loss of money’s purchasing power. This phenomenonoccurs constantly and stems from the banking system’s exnihilo creation of means of payment. This continuous transfer