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

248 Money, Bank Credit, and Economic Cyclesdeposits. In fact the nature of unbacked banknotes is identicalto that of secondary deposits and both produce the same economiceffects. They actually represent the same operation andresult in identical accounting records.Both activities generate considerable assets for banks, whogradually take this wealth from all economic agents in themarket through a process the agents cannot understand oridentify, one which leads to small decreases in the purchasingpower of the monetary units all use in society. Credit expansionis backed by the creation of new deposits or bills, andsince these are considered money in themselves, from the subjectivepoint of view of the public, they will never be withdrawnunder normal conditions. In this way banks appropriatea large volume of wealth, which from an accountingstandpoint they guarantee with deposits or bills that permitthem to disguise the fact that economically speaking they arethe only beneficiaries who completely take advantage de factoof these assets. Thus they have found a perennial source offinancing which will probably not be demanded from them, a“loan” they will never have to return (which is ultimately thesame as a “gift”). From an economic point of view, bankersand other related economic agents are the ones who takeadvantage of these extraordinary circumstances. They possessthe enormous power to create money, and they use this powercontinually to expand their assets, open new offices, hire newemployees, etc. Furthermore they have managed to keep theiractivities relatively hidden from most of the public, includingeconomists, by backing their created loans with liabilityaccounts (deposit accounts or banknote accounts) that do notcoincide with their actual equity. In short, bankers have discoveredtheir Philosopher’s Stone (much like the one soughtafterin the Middle Ages), which enables them to create newmonetary units from nothing, and thus to generate hiddenwealth, harming and deceiving third parties in the process. Inaccount books depositors are formally recognized as the ownersof such wealth, but in practice it does not belong to anyone(however, economically speaking, it belongs to the bankersthemselves). As we mentioned before, the recognition of thisfact is fundamental to our arguments in the last chapter,where we propose a plan for reforming the banking system.