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

696 Money, Bank Credit, and Economic Cyclesconsumption and investment remains unchanged, that thenew fiduciary media the bank creates may be used to step upspending on consumer goods, thus pushing up the relativeprices of this type of good.Fractional-reserve free-banking theorists generally considerany note or deposit a bank issues to be a “financial asset”which corresponds to a loan. From a legal standpoint, thisnotion involves serious problems, which we examined inthe first three chapters. Economically speaking, the error ofthese theorists lies in their belief that money is a “financialasset” which represents the voluntary saving of an economicagent who “loans” present goods in exchange forfuture goods. 140 Nevertheless money is itself a present good, 141and the possession of cash balances (or deposits) says nothingabout the proportions in which the economic agent wishes toconsume and invest. Thus increases and decreases in his140 How is it conceivable that banknotes and deposits, which are moneyin themselves, are also “financial assets” that signify that the bearer hasturned over money to a third party today in exchange for a certainamount of money in the future? The idea that notes and deposits are“financial assets” exposes the fact that banks in a fractional-reservebanking system duplicate means of payment ex nihilo: there is themoney lent to and enjoyed by a third party, and there is the financialasset which represents the operation and is also considered money. Toput it another way, financial assets are titles or certificates which signifythat someone has given up present money on handing it over to anotherin exchange for a larger quantity of future money. If, at the same time,financial assets are considered money (by the bearer), then an obvious,inflationary duplication of means of payment takes place in the marketwhich originates in the granting of a new loan without anyone’s havingto save the same amount first.141 Money is a perfectly liquid present good. With respect to the bankingsystem as a whole, fiduciary media are not “financial assets,” since theyare never withdrawn from the system, but circulate indefinitely and, hence,are money (or to be more precise, perfect money substitutes). In contrast,a financial asset represents the handing over of present goods(generally money) in exchange for future goods (also generally monetaryunits) on a specified date, and its creation corresponds to a rise inan economic agent’s real saving. See Gerald P. O’Driscoll, “Money:Menger’s Evolutionary Theory,” History of Political Economy 4, no. 18(1986): 601–16.