The Theory of Money and Credit - Ludwig von Mises [154]
4 The Redemption Fund
A person who holds money substitutes and wishes to transact business with persons to whom these money substitutes are unfamiliar and therefore unacceptable in lieu of money is obliged to change the money substitutes into money. He goes to the body that is responsible for maintaining equivalence between the money substitutes and money and proceeds to enforce the claim that the money substitutes embody. He presents the notes (or token coins or similar form of currency) for conversion or withdraws his deposits. It follows from this that whoever issues money substitutes is never able to put more of them into circulation than will meet the needs of his customers for business among themselves. All issues in excess of this will return to the issuer, who will have to accept them in exchange for money if he does not wish to destroy the confidence on which his whole business is built up. (In view of what has been said in the preceding chapter and remains to be said in the following chapter, it should not be necessary to state expressly in this place also that this is true only when several coexisting banks issue money substitutes which have a limited capacity of circulation. If there is only a single bank issuing money substitutes, and if these money substitutes have an unlimited capacity of circulation, then there are no limits to the extension of the issue of fiduciary media. The case would be the same if all the banks had a common understanding as to the issue of their money substitutes and extended the circulation of them according to uniform principles.)
Thus, in the circumstances assumed, it is not possible for a bank to issue more money substitutes than its customers can use; everything in excess of this must flow back to it. There is no danger in this so long as the excess issue is one of money certificates; but an excess issue of fiduciary media is catastrophic.
Consequently the chief rule to be observed in the business of a credit-issuing bank is quite clear and simple: it must never issue more fiduciary media than will meet the requirements of its customers for their business with each other. But it must be admitted that there are unusually big difficulties in the practical application of this maxim for there is no way of determining the extent of these requirements on the part of customers. In the absence of any exact knowledge on this point the bank has to rely upon an uncertain empirical procedure which may easily lead to mistakes. Nevertheless, prudent and experienced bank directors—and most bank directors are prudent and experienced—usually manage pretty well with it.
It is only exceptionally that the clienteles of the credit-issuing banks as such extend beyond political boundaries. Even those banks that have branches in different countries give complete independence to their individual branches in the issue of money substitutes. Under present political conditions, uniform administration of banking firms domiciled in different countries would hardly be possible; and difficulties of banking technique and legislation, and finally difficulties of currency technique, stand in the way also. Furthermore, within individual countries it is usually possible to distinguish two categories of credit banks. On the one hand there is a privileged bank, which possesses a monopoly or almost a monopoly of the note issue, and whose antiquity and financial resources, and still more its extraordinary reputation throughout the whole country, give it a unique position. And on the other hand there is a series of rival banks, which have not the right of issue and which, however great their reputation and the confidence in their solvency, are unable to compete in the capacity for circulation of their money substitutes with the privileged bank, behind which stands the state with all its authority. Different principles apply to the policies of the two kinds of bank. For the