The view has sometimes been expressed that if an issuing body wishes to secure equivalence between its fiduciary media and the money to which they refer, it should take precautions so as to be able to redeem those fiduciary media that are returned to it through lack of confidence on the part of the holders. It is impossible to subscribe to this view; for it completely fails to recognize the significance and object of a conversion fund.

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.

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.

The expressions solvency and liquidity are not always used correctly when they are applied to the circumstances of a bank. They are sometimes regarded as synonymous; but orthodox opinion understands them to refer to two different states. (It must be admitted that a clear definition and distinction of the two concepts is usually not attempted.)

The development of the clearing system, especially the extension of the clearinghouse proper, reduces the demand for money in the broader sense: part of the exchanges made with the help of money can be carried through without the actual physical circulation of money or money substitutes. Thus a tendency has arisen toward the reduction of the objective exchange value of money, which has counteracted the tendency for it to rise which was bound to result from the enormous increase in the demand for money in consequence of the progressive extension of the exchange economy.

In order to be able to make an accurate estimate of the bearing of clearing methods of payment and of fiduciary media on the development of the demand for money, it is necessary to be clear about the nature of variations in the demand for money.

It is usual to ascribe to the payment system elasticity that is said to be attained by means of the credit system and the continual improvements in banking organization and technique, the capacity of adjusting the available stock of money to the level of the demand for money at any time without exerting any influence on the exchange ratio between money and other economic goods.

The doctrine of the elasticity of fiduciary media, or more correctly expressed, of their automatic adjustment at any given time to the demand for money in the broader sense, stands in the very center of modern discussions of banking theory.

The German Bank Act of March 14, 1875, required that the notes issued in excess of the gold cover should be covered by bills of exchange; but in practice this provision has been understood to refer only to commodity bills. The significance of this prescription differs from that popularly attributed to it. It does not make the note issue elastic; it does not even bring it, as is erroneously believed, into an organic connection with the conditions of demand for money; these are all illusions, which should long ago have been destroyed.

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.