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

626 Money, Bank Credit, and Economic Cyclesdoctrine (i.e., that bank deposits are part of the monetary supply)had already been espoused by the Salamancan groupmost favorable to banking (Luis de Molina, Juan de Lugo,etc.), in nineteenth-century England it had been practicallyforgotten when Banking School theorists rediscovered it. Perhapsthe first to refer to this point was Henry Thornton himself,who, on November 17, 1797, before the Committee on theRestriction of Payments in Cash by the Bank, testified: “The balancesin the bank are to be considered in very much the samelight with the paper circulation.” 48 Nonetheless, in 1826 JamesPennington made the clearest assertion on this matter:The book credits of a London banker, and the promissorynotes of a country banker are essentially the same thing, thatthey are different forms of the same kind of credit; and that they areemployed to perform the same function . . . both the one and theother are substitutes for a metallic currency and are susceptibleof a considerable increase or diminution, without thecorresponding enlargement or contraction of the basis onwhich they rest. (Italics added) 49In the United States, in 1831, Albert Gallatin revealed theeconomic equivalence of bank bills and deposits and did somore explicitly than even Condy Raguet. Specifically, Gallatinwrote:48 Reprinted in the Records from Committees of the House of Commons, MiscellaneousSubjects, 1782, 1799, 1805, pp. 119–31.49 James Pennington’s contribution is dated February 13, 1826 and entitled“On Private Banking Establishments of the Metropolis.” It appearedas an appendix to Thomas Tooke’s book, A Letter to Lord Grenville; On theEffects Ascribed to the Resumption of Cash Payments on the Value of the Currency(London: John Murray, 1826); it was also included in Tooke’s work,History of Prices and of the State of the Circulation from 1793–1837, vol. 2, pp.369 and 374. Murray N. Rothbard points out that before Pennington,Pennsylvania Senator Condy Raguet, an American theorist of the CurrencySchool and defender of a 100-percent reserve requirement, hadalready shown (in 1820) that paper money is equivalent to deposits createdby banks which operate with a fractional reserve. On this topic seeRothbard, The Panic of 1819, p. 149 and footnote 52 on pp. 231–32, as wellas p. 3 of Rothbard’s book, The Mystery of Banking.