The Theory of Money and Credit - Ludwig von Mises [138]
The views on the nature of methods of payment which diminish the demand for money, which were developed by the Classical economists, were already known in the eighteenth century. Their acceptance in the writings of the Classical economists and the brilliant way in which they were expounded, ensured general recognition for them in the nineteenth and twentieth centuries also. The opposition which they occasionally called forth, has now sunk into silence. In all countries the aim of banking policy is to secure the greatest possible extension of money-economizing means of payment.
If metallic money is employed, then the advantages of a diminution of the demand for money due to the extension of such other means of payment are obvious. In fact, the development of the clearing system and of fiduciary media has at least kept pace with the potential increase of the demand for money brought about by the extension of the money economy, so that the tremendous increase in the exchange value of money, which otherwise would have occurred as a consequence of the extension of the use of money, has been completely avoided, together with its undesirable consequences. If it had not been for this the increase in the exchange value of money, and so also of the monetary metal, would have given an increased impetus to the production of the metal. Capital and labor would have been diverted from other branches of production to the production of the monetary metal. This would undoubtedly have meant increased returns to certain individual undertakings; but the welfare of the community would have suffered. The increase in the stock of precious metals which serve monetary purposes would not have improved the position of the individual members of the community, would not have increased the satisfaction of their wants; for the monetary function could also have been fulfilled by a smaller stock. And, on the other hand, a smaller quantity of economic goods would have been available for the direct satisfaction of human wants if a part of the capital and labor power that otherwise would have been used for their production had been diverted to mining precious metals. Even apart from the diversion of production, a decrease of prosperity would result from the fact that as a consequence of the rise in value of the precious metals caused by the use for monetary purposes the stock available for industrial employment would decrease, since certain quantities would be transferred from the latter employment to the former This all becomes particularly clear if we think of an economic community which does not itself produce the precious metals, but imports them. Here the amount of their cost is expressed by the quantity of commodities that must be surrendered to foreign countries in order to obtain the supplementary quantity of monetary metal in exchange. In a country that itself produces the precious metals, the matter is the same in principle; all that is different is the way of reckoning the loss of welfare through the sacrifice of the other branches of production and the preference for mining the precious metals; it is perhaps less perceptible, but it is just as comprehensible in theory. The measure of the additional harm done by the diversion of metal to monetary uses is always given by the quantity of metal that is withdrawn from other uses in favor of the monetary use.
Where fiat or credit money is employed, these reasons in favor of the extension of clearing methods of payment and of the use of fiduciary media do not arise.