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

The Credit Expansion Process 245If the bank fulfills its commitments for a lengthy period oftime and people completely trust it, it is certain that the publicwill gradually begin to use the banknotes (or the depositslips or receipts the bank issues in exchange for monetaryunits deposited) as if they were the units of commoditymoney themselves, thus converting the banknotes into monetaryunits (perfect money substitutes, to use Mises’s terminology).Given that money is a present good people need and useonly as a medium of exchange and not for their own consumption,if depositors trust the bank, their use of banknotesas money could be prolonged indefinitely (they would notneed to go to the bank and withdraw the monetary units theyoriginally deposited). When this situation arises, bankers maystart to feel tempted to issue deposit receipts for an amountexceeding the sum of monetary units actually deposited.Clearly if bankers succumb to this temptation, they violateuniversal legal principles and commit not only the crime ofcounterfeiting (by issuing a false receipt unbacked by a correspondingdeposit), but the crime of fraud as well, by presentingas a means of payment a document that in reality lacks allbacking. 40 Nevertheless, if people place enough trust in thebank and the banker knows from experience that a reserveratio, c, of 0.1 will permit him to honor his commitmentsunder ordinary circumstances, he will be able to issue up tonine times more in new false deposit receipts or banknotes.His corresponding journal entry will appear as follows:Bank A(55) Debit Credit9,000,000 Loans Banknotes 9,000,00040 He who has made a special promise to give definite parcels ofgoods in return for particular individual papers, cannot issueany such promissory papers without holding correspondinggoods. If he does so, he will be continually liable to be convictedof fraud or default by the presentation of a particular document.(Jevons, Money and the Mechanism of Exchange, p. 209)