The Mystery of Banking

part of the money supply. But car-
rying them enables me to walk around with a far lower cash bal-
ance, for they provide me with the ability to borrow instantly
from the credit card companies. Credit cards permit me to econ-
omize on cash. 
The development of credit cards, clearing systems, and other
devices to economize cash, will therefore cause the demand for
money to be reduced, and prices to increase. Again, however,
these effects are one-shot, as the new device is invented and
spreads throughout the economy, and its impact is probably not
very important quantitatively. These new devices cannot begin to
account for the chronic, let alone the accelerating, inflation that
plagues the modern world. 
4. C
ONFIDENCE IN THE
M
ONEY
An intangible, but highly important determinant of the
demand for money, is the basic confidence that the public or mar-
ket has in the money itself. Thus, an attempt by the Mongols to
introduce paper money in Persia in the twelfth and thirteenth cen-
turies flopped, because no one would accept it. The public had no
confidence in the paper money, despite the awesomely coercive
decrees that always marked Mongol rule. Hence, the public’s
demand for the money was zero. It takes many years—in China it
took two to three centuries—for the public to gain enough confi-
dence in the money, so that its demand for the money will rise
from near zero to a degree great enough to circulate throughout
the kingdom. 
Public confidence in the country’s money can be lost as well
as gained. Thus, suppose that a money is King Henry’s paper, and
King Henry has entered a war with another state which he seems
about to lose. King Henry’s money is going to drop in public
esteem and its demand can suddenly collapse. 
It should be clear then, that the demand for paper money, in
contrast to gold, is potentially highly volatile. Gold and silver are
always in demand, regardless of clime, century, or government in
The Demand for Money
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power. But public confidence in, and hence demand for, paper
money depends on the ultimate confidence—or lack thereof—of
the public in the viability of the issuing government. Admittedly,
however, this influence on the demand for money will only take
effect in moments of severe crisis for the ruling regime. In the
usual course of events, the public’s demand for the government’s
money will likely be sustained. 
5. I
NFLATIONARY OR
D
EFLATIONARY
E
XPECTATIONS
We have dealt so far with influences on the demand for
money that have been either one-shot (frequency of payment and
clearing systems), remote (confidence in the money), or gradual
(supply of good and services). We come now to the most impor-
tant single influence on the demand for money: This is the pub-
lic’s expectation of what will happen to prices in the near, or fore-
seeable, future. Public expectation of future price levels is far and
away the most important determinant of the demand for money. 
But expectations do not arise out of thin air; generally, they
are related to the immediate past record of the economy. If prices,
for example, have been more or less stable for decades, it is very
likely that the public will expect prices to continue on a similar
path. There is no absolute necessity for this, of course; if condi-
tions are changing swiftly, or are expected to change quickly, then
people will take the changes into account. 
If prices are generally expected to remain the same, then the
demand for money, at least from the point of view of expecta-
tions, will remain constant, and the demand for money curve will
remain in place. But suppose that, as was the case during the rel-
atively free-market and hard-money nineteenth century, prices
fell gradually from year to year. In that case, when people knew
in their hearts that prices would be, say, 3 percent lower next
year, the tendency would be to hold on to their money and to
postpone purchase of the house or washing machine, or whatever,
until next year, when prices would be lower. Because of these