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

244 Money, Bank Credit, and Economic Cycles7THE PARALLELS BETWEEN THE CREATION OF DEPOSITSAND THE ISSUANCE OF UNBACKED BANKNOTESThe economic analysis of the issuance of unbacked banknotes,an operation which emerged long after the discovery offractional-reserve banking, is not one of the main purposes ofthis book. 39 However it could be useful at this point to considerin some detail the accounting and legal aspects of theissuance of unbacked banknotes, since as we will demonstrate,its effects are identical to those produced by banks’ creationof loans and deposits from nothing.Let us imagine that banking is just beginning to emerge, andbanks act as true depositaries of money as stipulated in an irregulardeposit contract. As long as the general legal principles westudied in chapters 1 through 3 are upheld, banks will acceptmonetary units (usually gold or any other type of commoditymoney) and keep them in their vaults, and in return they willgive depositors deposit certificates, receipts or banknotes forthe entire sum deposited. A bank which correctly honors itscommitments will make the following entry in its journal:Bank A(54) Debit CreditCash 1,000,000 Deposit receipts 1,000,000or banknotesPhillip Cagan, Determinance and Effects of Changes in the Stock of Money,1875–1960 (New York: Columbia University Press, 1965). Also, JoséMiguel Andreu García has written extensively on the topic of bank multipliersand reserve requirements. For example, see his articles, “Entorno a la neutralidad del coeficiente de caja: el caso español,” in Revistade Economía, no. 9, and “El coeficiente de caja óptimo y su posible vinculacióncon el déficit público,” Boletín Económico de Información ComercialEspañola (June 29–July 5, 1987): 2425ff.39 Usher, The Early History of Deposit Banking in Mediterranean Europe, pp.9 and 192.