Passage in Human Action

Economics Economics Questions
1

Here’s the quote:

[quoteuser=“людвиг фон мизес”]

But now, we assume further, one bank alone embarks upon an additional issue of fiduciary media while the other banks do not follow suit. The clients of the expanding bank - whether its old clients or new ones acquired on account of the expansion - receive additional credits, they expand their business activities, they appear on the market with an addidtional demand for goods and services, they bid up prices. Those people who are not clients of the expanding bank are not in a position to afford these higher prices; they are forced to restrict their purchases. Thus there prevails on the market a shifting of goods from the nonclients to the clients of the expanding bank. The clients buy more from the nonclients than they receive from them. But money-substitutes issued by the expanding bank are not suitable for payments to nonclients, as these people do not assign to them the character of money-substitutes. In order to settle the payments due to nonclients, the clients must first exchange the money-substitutes issued by their own - viz., the expanding bank- against money. The expanding bank must redeem its banknotes and pay out its deposits. Its reserve - we suppose that only a part of the money-substitutes it had issued had the character of fiduciary media - dwindles […] In order to avoid insolvency it must as soon as possible return to a policy of strengthening its money reserve. It must abandon its expansionist methods.

[/quote]

So he’s saying that, in a free banking scenario, bank expansion will lead to a situation in which the expansion must end. Clients have more to spend and buy from nonclients. This much I understand. But he says that money-subsitutes issued by the expanding bank are not suitable for payments to nonclients, as these people do not assign to them the character of money-substitutes. How can one be certain that nonclients do not consider the banknotes money-substitutes? How can he assume that clients of the bank will assume that nonclients of the bank will not accept the bank notes? Perhaps he’s saying so, but on a long enough timeline wherein the reputation of the bank gradually diminishes? But it doesn’t really sound like that from the passage.

Thoughts?

2

My guess is that it would have to do with the relationship between the bank and its clients. In a free banking scenario, one imagines that banks might reserve the right to refuse to honor the redemption of money substitutes from non-clients. Or maybe I am just making things up.

3

The beginning of the chapter lays it all out:

People deal with money-substitutes as if they were money because they are fully confident that it will be possible to exchange them at any time without delay and without cost against money. We may call those who share in this confidence and are therefore ready to deal with money-substitutes as if they were money, the clients of the issuing banker, bank, or authority.

And again:

At this point of our investigations we have to scrutinize the problem of the coexistence of a multiplicity of independent banks. Independence means that every bank in issuing fiduciary media follows its own course and does not act in concert with other banks. Co-existence means that every bank has a clientele which does not include all members of the market system.

Bottom line, he’s talking about a theoretical case. He defines nonclients of Bank A as those who won’t accept checks or notes from Bank A. [=first paragraph quoted above]. He then assumes the existence of nonclients [=second paragraph], Then he analayzes what would happen, given the definition and the assumption.

Hope that helped.

4

Ok. So he declares a distinction between a client (someone who excepts a bank’s note as a money-substitute) and a customer (someone who deposits money at said bank). So there’s no confusion about assuming nonclient’s rejection of a bank’s note as a money-substitute by definition of the term client.

Thanks for the help.

5

YW