Mises on Money by Gary North

Author:Gary North
Language: eng
Format: mobi, epub, pdf
ISBN: 9781610165310
Publisher: Ludwig von Mises Institute
Published: 2012-06-04T05:00:00+00:00

MISES VS. FRACTIONAL RESERVES

Mises grew increasingly hostile to fractional reserve banking as he grew older. His 1951 appendix in Theory of Money and Credit, “Monetary Reconstruction,” represents his post-World War II, post-Keynesian hostility to monetary inflation. But even in 1924, his hostility was apparent.

His two objections to fiduciary media or credit money issued by a fractionally reserved banking system were the same as his objection to any increase in the money supply: its wealth-redistribution effects over time and its creation of a boom-bust business cycle. With respect to the first negative effect, he wrote: “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 . . .” (p. 314). Borrowers want capital, but they get money—newly created credit money. More credit money has been issued by the banking system than savers have deposited. Those participants in the economy who suffer losses due to price changes were not parties to the original credit transactions. They are participants in the economy who receive the new money late in the process, after prices have been bid up by the credit money. In a chapter titled, “The Evolution of Fiduciary Media,” Mises summarized the process of wealth redistribution.

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,

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