The Theory of Money and Credit - Ludwig von Mises [144]
In the face of this, we must first of all ask how it is possible to justify the drawing of a fundamental distinction between banknotes and other money substitutes, between banknotes not covered by money and other fiduciary media. Deposits which can be drawn upon at any time by check, apart from certain minor technical and juristic details which make them unusable in retail trade and for certain other payments, are just as good a money substitute as the banknote. It is a matter of indifference from the economic point of view whether the bank discounts a bill by paying out currency in notes or by a credit on a giro account. From the point of view of banking technique there may be certain differences of importance to the bank official; but whether the bank issues credit in the business of discounting only or whether it also grants other short-term loans cannot be a very fundamental issue. A bill is only a form of promissory note with a special legal and commercial qualification. No economic difference can be found between a claim in the form of a bill and any other claim of equal goodness and identical time of maturity. And the commodity bill, again, differs only juristically from an open book debt that has come into being through a credit-purchase transaction. Thus it comes to the same thing in the end whether we talk of the elasticity of the note circulation based on commodity bills or of the elasticity of a circulation of fiduciary media resulting from the cession of short-term claims arising out of credit sales.
Now the number and extent of purchases and sales on credit are by no means independent of the credit policy followed by the banks, the issuers of fiduciary media. If the conditions under which credit is granted are made more difficult, their number must decrease; if the conditions are made easier, their number must increase. When there is a delay in the payment of the purchase price, only those can sell who do not need money immediately; but in this case bank credit would not be requisitioned at all. Those, however, who want money immediately can only make sales on credit if they have a prospect of immediately being able to turn into money the claims which the transaction yields them. Other granters of credit can only place just so many present goods at the disposal of the loan market as they possess; but it is otherwise with the banks, which are able to procure additional present goods by the issue of fiduciary media. They are in a position to satisfy all the requests for credit that are made to them. But the extent of these requests depends merely upon the price that they demand for granting the credit. If they demand less than the natural rate of interest—and they must do this if they wish to do any business at all with the new issue of fiduciary media; it must not be forgotten that they are offering an additional supply of credit to the market—then these requests will increase.
When the loans granted by the bank through the issue of fiduciary media fall due for repayment, then it is true that a corresponding sum of fiduciary media returns to the bank, and the quantity in circulation is diminished. But fresh loans are issued by the bank at the same time and new fiduciary media flow into circulation. Of course, those who hold the commodity-bill theory will object that a further issue of fiduciary media can take place only if new commodity bills come into existence and are presented for discounting. This is quite true. But whether new commodity bills come into existence depends upon the credit policy of the banks.
Let us just picture to ourselves the life history of a