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

794 Money, Bank Credit, and Economic Cyclesbank’s issuance of these legal bills would not be inflationaryin any way, since the sole purpose of this action would be toback the total amount of demand deposits (and equivalents),and each and every bank would receive banknotes for a sumidentical to its corresponding deposits. In this way a 100-percentreserve requirement could be established immediately,and banks should be prohibited from granting further loansagainst demand deposits. In any case, such deposits wouldalways have to remain perfectly balanced with a reserve (inthe form of bills held by banks) absolutely equal to the total ofdemand deposits or equivalents.We must point out that Hart suggests the new papermoney the central bank prints to back deposits be handed overto banks as a gift. If this occurs, it is obvious that banks’ balancesheets will reflect an enormous surplus, one precisely equal tothe sum of demand deposits backed 100 percent by a reserve.We might ask ourselves who should own the total ofbanks’ accounting assets which exceed their net worth. For theoperation we have just described reveals that by functioningwith a fractional reserve, private banks have historically createdmeans of payment in the form of loans produced ex nihilo,and these loans have permitted banks to gradually expropriatewealth from the whole of the rest of society. Once we takeinto account the difference between banks’ income and expenditureseach year, the aggregate wealth the banking systemhas expropriated in this way (by a process that produces theeffects of a tax, just as inflation does for the government) isprecisely equal to the assets banks possess in the form of realestate, branch offices, equipment and especially, the sum oftheir investments in loans to industry and trade, in securitiesacquired on the stock market and elsewhere, and in treasurybonds issued by the government. 9999 Mises first pointed out that banknotes and deposits created fromnothing through the fractional-reserve banking system generate wealththat could be considered the profit of banks themselves, and weexplained this idea in chapter 4, when we indicated that such depositsprovide an indefinite source of financing. The fact that in account