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

Central and Free Banking Theory 695Under these conditions, banks are simply intermediaries ofloanable funds. 138Nonetheless it is entirely possible that the public maysimultaneously increase their balances of fiduciary media andtheir demand for consumer goods and services, if they decideto cut back on their investments. For economic agents canemploy their money balances in any of the following threeways: they can spend them on consumer goods and services;they can spend them on investments; or they can hold them ascash balances or fiduciary media. There are no other options.The decision on the proportion to spend on consumption orinvestment is distinct and independent from the decision on theamount of fiduciary media and cash to hold. Thus we cannotconclude, as Selgin does, that any money balance is equal to“savings,” since a rise in the balance of fiduciary media mayvery well depend on a drop in investment spending (via thesale of securities on the stock market, for instance) whichmakes it possible to increase final monetary expenditure onconsumer goods and services. Under these circumstances anindividual’s savings would drop, while his balance of fiduciarymedia would rise. Therefore it is incorrect to qualify assavings all increases in fiduciary media.To maintain, as Selgin does, that “every holder of demandliabilities issued by a free bank grants that bank a loan for thevalue of his holdings” 139 is the same as asserting that any creationof money, in the form of deposits or notes, by a bank ina fractional-reserve free-banking system ultimately amountsto an a posteriori concession of a loan to the bank for theamount created. However the bank generates loans from nothingand offers additional purchasing power to entrepreneurs,who receive the loans without a thought to the true desires ofall other economic agents regarding consumption and investment,when these other individuals will ultimately becomethe final holders of the fiduciary media the bank creates.Hence it is entirely possible, if the social time preference on138 Selgin, The Theory of Free Banking, pp. 54–55.139 Selgin, “The Stability and Efficiency of Money Supply under FreeBanking,” p. 440.