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

616 Money, Bank Credit, and Economic Cycleslevel. Cantillon, a banker first and foremost, justified fractional-reservebanking and his self-interested use of anymoney or securities his customers entrusted to him as anirregular deposit of fungible goods indistinguishable fromone another. In fact chapter 6 (“Des Banques, et de leurcredit”) of part 3 of his notable work, Essai sur la nature du commerceen général, contains the first theoretical analysis of fractional-reservebanking, in which Cantillon not only justifiesthe institution but also draws the conclusion that banks, undernormal conditions, can smoothly conduct business with a 10-percent cash reserve. Cantillon states:If an individual has to pay a thousand ounces to another, hewill pay him with a banker’s note for that sum. Possibly thisother person will not claim the money from the banker, butwill keep the note and, when the occasion requires it, handit over to a third person as payment. Thus the note in questionmay be exchanged many times to make large payments,without anyone’s thinking of demanding the money fromthe banker for a long time. There will hardly be anyone who,due to a lack of complete trust or to a need to make smallpayments, will demand the sum. In this first case, a banker’scash does not represent as much as 10 percent of his business.(Italics added) 2828 Si un particulier a mille onces à païer à un autre, il lui donneraen paiement le billet du Banquier pour cette somme: cet autren’ira pas peut-être demander l’argent au Banquier; il gardera lebillet et le donnera dans l’occasion à un troisième en paiement,et ce billet pourra passer dans plusieurs mains dans les grospaiements, sans qu’on en aille de long-temps demander l’argentau banquier: il n’y aura que quelqu’un qui n’y a pas une parfaiteconfiance, ou quelqu’un qui a plusieurs petites sommes à païerqui en demandera le montant. Dans ce premier exemple la caissed’un Banquier ne fait que la dixième partie de son commerce. (Cantillon,Essai sur la nature du commerce en général, pp. 399–400)Cantillon obviously makes the same observation the theorists of theSchool of Salamanca had almost two centuries earlier with respect tobankers in Seville and other cities. Because these bankers enjoyed thepublic’s trust, they could consistently conduct their business whilemaintaining only a small fraction in cash to cover current payments.And, most importantly, that loans extended against deposits increasethe money supply and create “disorders“ (pp. 408–13).