The Theory of Money and Credit - Ludwig von Mises [126]
[11] Thus Lexis, Allegemeine Volkswirtschaftslehre (Berlin, 1910) (Hinnenberg, Die Kultur der Gegenwart, section II, vol. 10, Part 1), p. 122; Lexis, Geld und Preise (Riesser-Festgabe, Berlin, 1913), pp. 83 f. Similarly, with regard to the clearinghouse business, Schumacher, Weltwirtschaftliche Studien (Leipzig, 1911), pp. 53 f. and the writings there referred to.
Chapter 16. The Evolution of Fiduciary Media
1. The Two Ways of Issuing Fiduciary Media. 2. Fiduciary Media and the Clearing System. 3. Fiduciary Media in Domestic Trade. 4. Fiduciary Media in International Trade.
1 The Two Ways of Issuing Fiduciary Media
Thus fiduciary media are claims to the payment of a given sum on demand, which are not covered by a fund of money and whose legal and technical characteristics make them suitable for tender and acceptance instead of money in fulfillment of obligations that are in terms of money. As has already been suggested, it is not the dead letter of the law so much as actual business practice that counts, so that some things function as fiduciary media, although they cannot be regarded as promises to pay money from the juristic point of view, because they nevertheless are in fact honored as such by somebody or other. We were able to show that, so far as they are not money certificates, even modern token coins and such kinds of money as the German thaler during the period from the establishment of the gold standard until its abolition, constitute fiduciary media and not money.
Fiduciary media may be issued in two ways: by banks, and otherwise. Bank fiduciary media are characterized by being dealt with as constituting a debt of the issuing body. They are entered as liabilities, and the issuing body does not regard the sum issued as an increase of its income or capital, but as an increase on the debit side of its account, which must be balanced by a corresponding increase on the credit side if the whole transaction is not to figure as a loss. This way of dealing with fiduciary media makes it necessary for the issuing body to regard them as part of its trading capital and never to spend them on consumption but always to invest them in business. These investments need not always be loans; the issuer may himself carry on a productive enterprise with the working capital that is put into his hands by the issue of fiduciary media. It is known that some deposit banks sometimes open deposit accounts without a money cover not only for the purpose of granting loans, but also for the purpose of directly procuring resources for production on their own behalf. More than one of the modern credit and commercial banks has invested a part of its capital in this manner, and the question of the right attitude in this case of the holders of the money substitutes, and of the state legislature that feels itself called upon to protect them, remains an open one. In earlier times there was a similar problem concerning banks issuing notes[1] until banking practice or the law prescribed short-term loans as "cover."
The issuer of fiduciary media may, however, regard the value of the fiduciary media put into circulation as an addition to his income or capital. If he does this, he will not take the trouble to cover the increase in his obligations due to the issue by setting aside a special credit fund out of his capital. He will pocket the profits of the issue, which in the case of token coinage is called seigniorage, as composedly as any other sort of income.
The only difference between the two ways of putting fiduciary media into circulation lies in the attitude of the issuer.