The Theory of Money and Credit - Ludwig von Mises [151]
Now the complete equivalence of sums of money and secure claims to immediate payment of the same sums gives rise to a consequence that has extremely important bearings on the whole monetary system; namely, the possibility of tendering or accepting claims of this sort wherever money might be tendered or accepted. Exchanges are made through the medium of money; this fact remains unaltered. Buyers buy with money, and sellers sell for it. But exchanges are not always made by the transfer of a sum of money. They may also be made by the transfer or assignment of a claim to money. Now claims to money which fulfill the conditions mentioned above pass from hand to hand without those who acquire them feeling any need for actually enforcing them. They completely perform all the functions of money. Why then should the bidders burden themselves with the trouble of redeeming them? The claim which has been set in circulation remains in circulation, and becomes a money substitute. So long as confidence in the soundness of the bank is unshaken, and so long as the bank does not issue more money substitutes than its customers require for their dealings with one another (and everybody is to be regarded as a customer of the bank who accepts its money substitutes in place of money), then the situation in which the right behind the money substitute is enforced by presentation of notes for redemption or by withdrawal of deposits simply does not arise. The bank-of-issue may therefore assume that its money substitutes will remain in circulation until the necessity of dealing with persons outside the circle of customers forces holders to redeem them. This, in fact, is the very thing which enables the bank to issue fiduciary media at all, that is, to put money substitutes in circulation without maintaining in readiness the sum that would be necessary to keep the promise of immediate conversion that they represent.
The body which issues the fiduciary media and is responsible for maintaining their equivalence with the sums of money to which they refer must nevertheless be able to redeem promptly those fiduciary media which their holders present for conversion into money when they have to make payments to persons who do not recognize these fiduciary media as money substitutes. This is the only way in which a difference between the value of money on the one hand and of the notes and deposits on the other hand can be prevented from coming into existence.
2 The Return of Fiduciary Media to the Issuer on Account of Lack of Confidence on the Part of the Holders
The view has sometimes been expressed that if an issuing body wishes to secure equivalence between its fiduciary media and the money to which they refer, it should take precautions so as to be able to redeem those fiduciary media that are returned to it through lack of confidence on the part of the holders. It is impossible to subscribe to this view; for it completely fails to recognize the significance and object of a conversion fund. It cannot be the function of a conversion fund to enable the issuing body to redeem its fiduciary media when its counters are besieged by holders who have lost confidence in them. Confidence in the capacity of circulation of fiduciary media is not an individual phenomenon; either it is shared by everybody or it does not exist at all. Fiduciary media can fulfill their function only on the condition that they are fully equivalent to the sums of money to which they refer. They cease to be equivalent to these sums of money as soon as confidence in the issuer is shaken even