The Theory of Money and Credit - Ludwig von Mises [147]
6 The Periodical Rise and Fall in the Extent to Which Bank Credit Is Requisitioned
The requests made to the banks are requests, not for the transfer of money, but for the transfer of other economic goods. Would-be borrowers are in search of capital, not money. They are in search of capital in the form of money, because nothing other than power of disposal over money can offer them the possibility of being able to acquire in the market the real capital which is what they really want. Now the peculiar thing, which has been the source of one of the most difficult puzzles in economics for more than a hundred years, is that the would-be borrower's demand for capital is satisfied by the banks through the issue of money substitutes. It is clear that this can only provide a provisional satisfaction of the demands for capital. The banks cannot evoke capital out of nothing. If the fiduciary media satisfy the desire for capital, that is if they really procure disposition over capital goods for the borrowers, then we must first seek the source from which this supply of capital comes. It will not be particularly difficult to discover it. If the fiduciary media are perfect substitutes for money and do all that money could do, if they add to the social stock of money in the broader sense, then their issue must be accompanied by appropriate effects on the exchange ratio between money and other economic goods. The cost of creating capital for borrowers of loans granted in fiduciary media is borne by those who are injured by the consequent variation in the objective exchange value of money; but the profit of the whole transaction goes not only to the borrowers, but also to those who issue the fiduciary media, although these admittedly have sometimes to share their gains with other economic agents, as when they hold interest-bearing deposits, or the state shares in their profits.
The entrepreneurs who approach banks for loans are suffering from shortage of capital; it is never shortage of money in the proper sense of the word that drives them to present their bills for discounting. In some circumstances this shortage of capital may be only temporary; in other circumstances it may be permanent. In the case of the many undertakings which constantly draw upon short-term bank credit, year in, year out, the shortage of capital is a permanent one.
For the problem with which we are concerned, the circumstances causing the shortage of capital on the part of entrepreneurs do not matter. We may even provisionally disregard, as of minor importance, the question whether the shortage is one of investment capital or working capital. Sometimes the view is propounded that it is unjustified to procure investment capital partly by way of bank credit although this is less undesirable as a way of procuring working capital. Such arguments as these have played an important part in recent discussions of banking policy. The banks have been adversely criticized on the ground of their having used a considerable part of the credit issued by them for granting loans to industrial enterprises in search not of fixed but of working capital and of having thus endangered their liquidity. Legislation has been demanded to limit to liquid investments only the assets backing the liabilities arising from the issue of fiduciary media. Provisions of this sort are designed to deal with fiduciary media in the form of deposits in the same way as the note issue has been dealt with under the influence of the doctrines of the Currency School. We have already commented on their significance and have shown, as further discussion will remind us, that the only practical