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

606 Money, Bank Credit, and Economic Cyclesto discover that demand deposits in banks form part of themoney supply in their entirety, and thus affect the economy inthe same way as bank bills. Luis de Molina had already clearlyillustrated this fact over two centuries earlier in Disputation409 of his work, Tratado sobre los cambios [“Treatise onexchanges”]. In fact, Molina states:People pay bankers in two ways: both in cash, by givingthem the coins; and with bills of exchange or any other typeof draft, by virtue of which the one who must pay the draftbecomes the bank’s debtor for the amount which the draftindicates will be paid into the account of the person whodeposits the draft in the bank. 6Specifically, Molina is referring to certain documents whichhe calls chirographis pecuniarum (“written money”), and whichwere used as payment in many market transactions. Thus:Though many transactions are conducted in cash, most arecarried out using documents which attest either that thebank owes money to someone or that someone agrees topay, and the money stays in the bank.Moreover Molina indicates that these checks are considered“on demand”: “The term ‘demand’ is generally used todescribe these payments, because the money must be paid themoment the draft is presented and read.” 7Most importantly, long before Thornton in 1797 and Penningtonin 1826, Molina expressed the essential idea that thetotal volume of monetary transactions conducted at a marketcould not be carried out with the amount of cash whichchanges hands at the market, were it not for the money bankscreate with their deposit entries, and depositors’ issuance ofchecks against these deposits. Hence banks’ financial activitiesresult in the ex nihilo creation of a new sum of money (in theform of deposits) which is used in transactions. Indeed Molinaexpressly tells us:6 Molina, Tratado sobre los cambios, p. 145.7 Ibid., p. 146.