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By Root 1217 0

if only among a part of the community. The yokel who presents his note for redemption in order to convince himself of the bank's capacity to pay, which nobody else doubts, is only a comic figure that the bank has no need to fear It need not make any special arrangements or take any special precautions on his account. But any bank that issues fiduciary media is forced to suspend payments if everybody begins to present notes for redemption or to withdraw deposits. Any such bank is powerless against a panic; no system and no policy can help it then. This follows necessarily from the very nature of fiduciary media, which imposes upon those who issue them the obligation to pay a sum of money which they cannot command. [1]

The history of the last two centuries contains more than one example of such catastrophes. Those banks that have succumbed to the onslaughts of noteholders and depositors have been reproached with bringing about the collapse by granting credit imprudently, by tying up their capital, or by advancing loans to the state; extremely serious charges have been brought against their directors. Where the state itself has been the issuer of the fiduciary media, the impossibility of maintaining their redeemability has usually been ascribed to their having been issued in defiance of precepts based on banking experience. It is obvious that this attitude is due to a misunderstanding. Even if the banks had put all their assets in short investments, that is, in investments that could have been realized in a relatively short time, they would not have been able to meet the demands of their creditors. This follows merely from the fact that the banks' claims fall due only after notice has been given, while those of their creditors are payable on demand. Thus there lies an irresolvable contradiction in the nature of fiduciary media. Their equivalence to money depends on the promise that they will at any time be converted into money at the demand of the person entitled to them and on the fact that proper precautions are taken to make this promise effective. But—and this is likewise involved in the nature of fiduciary media—what is promised is an impossibility insofar as the bank is never able to keep its loans perfectly liquid. Whether the fiduciary media are issued in the course of banking operations or not, immediate redemption is always impracticable if the confidence of the holders has been lost.

3 The Case Against the Issue of Fiduciary Media

Recognition of the fact, which had been pointed out before the time of Ricardo, that there is no way in which an issuer of fiduciary media can protect itself against the consequences of a panic or avoid succumbing to any serious run, may lead, if one likes, to a demand that the creation of fiduciary media should be prohibited. Many writers have adopted this attitude. Some have demanded the prohibition of the issue of such notes as have no metal backing; others, the prohibition of all clearing transactions except with full metallic cover; others again, and this is the only logical position, have combined both demands. [2]

Such demands as these have not been fulfilled. The progressive extension of the money economy would have led to an enormous extension in the demand for money if its efficiency had not been extraordinarily increased by the creation of fiduciary media. The issue of fiduciary media has made it possible to avoid the convulsions that would be involved in an increase in the objective exchange value of money, and reduced the cost of the monetary apparatus. Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them. In the early days of the modern banking system they played a further part still by strengthening the credit-negotiating activities of the banks (which in those times could hardly have proved profitable if carried on for their own sake alone) and so brought the system safely past those obstacles which obstructed its beginnings.

Prohibition of the issue of all notes except those