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

694 Money, Bank Credit, and Economic CyclesTHE CONFUSION BETWEEN THE CONCEPT OF SAVINGAND THAT OF THE DEMAND FOR MONEYThe attempt to recover at least the essence of the old“needs of trade” doctrine and to show that a fractional-reservefree-banking system would not trigger economic cycles hasled George A. Selgin to defend a thesis similar to the one JohnMaynard Keynes presents in connection with bank deposits.Indeed let us remember that, according to Keynes, anyonewho holds additional money from a loan is “saving”:Moreover, the savings which result from this decision arejust as genuine as any other savings. No one can be compelledto own the additional money corresponding to thenew bank-credit, unless he deliberately prefers to hold moremoney rather than some other form of wealth. 137George Selgin’s position resembles Keynes’s. Selginbelieves public demand for cash balances in the form of banknotesand deposit accounts reflects the desire to offer shorttermloans for the same amount through the banking system.Indeed, Selgin states:To hold inside money is to engage in voluntary saving. . . .Whenever a bank expands its liabilities in the process ofmaking new loans and investments, it is the holders of theliabilities who are the ultimate lenders of credit, and whatthey lend are the real resources they could acquire if,instead of holding money, they spent it. When the expansionor contraction of bank liabilities proceeds in such away as to be at all times in agreement with changingdemands for inside money, the quantity of real capitalfunds supplied to borrowers by the banks is equal to thequantity voluntarily offered to the banks by the public.137 Keynes, The General Theory of Employment, Interest and Money, p. 83.This thesis, which we covered in chapter 7, stems from the tautology ofequating saving with investment, an error which underlies all ofKeynes’s work and which, according to Benjamin Anderson, is tantamountto equating inflation with saving.