Thus there is no such thing as an automatic adjustment of the quantity of fiduciary media in circulation to fluctuations in the demand for money without an effect on the objective exchange value of money. Consequently all those arguments are ill founded which seek to deny practical significance to the quantity theory by reference to the alleged elasticity of the circulation of money.

Thus fiduciary media are claims to the payment of a given sum on demand, which are not covered by a fund of money and whose legal and technical characteristics make them suitable for tender and acceptance instead of money in fulfillment of obligations that are in terms of money.

That want of clarity concerning the nature of fiduciary media which constitutes the chief characteristic of the writings of the banking theorists and their epigoni, the modern writers on problems of banking theory, leads to a perpetual confusion between money substitutes and a series of institutions which reduce the demand for money in the narrower sense, and also to relative neglect of the differences that exist between money certificates and fiduciary media within the group of money substitutes proper.

In the domestic trade of most civilized countries, the actual use of money for transacting exchanges made with the help of money has been very largely superseded by the use of money substitutes. And among the money substitutes, fiduciary media play a constantly increasing part. At the same time, the number of exchanges made with the help of money which are settled by the offsetting of counterclaims is growing also.

The practice of making payments by the writing off or reciprocal balancing of claims is not restricted by the boundaries of states or countries. It was in fact in trade between different areas that the need for it was earliest and most strongly felt. The transportation of money always involves not inconsiderable cost, loss of interest, and risk. If the claims arising out of various transactions are liquidated not by the actual transference of money, but by balancing or offsetting, then all these expenses and dangers can be avoided.

The business of banking falls into two distinct branches: the negotiation of credit through the loan of other people’s money and the granting of credit through the issue of fiduciary media, that is, notes and bank balances that are not covered by money. Both branches of business have always been closely connected. They have grown up on a common historical soil, and nowadays are still often carried on together by the same firm.

The activity of the banks as negotiators of credit is characterized by the lending of other people’s, that is, of borrowed, money. Banks borrow money in order to lend it; the difference between the rate of interest that is paid to them and the rate that they pay, less their working expenses, constitutes their profit on this kind of transaction. Banking is negotiation between granters of credit and grantees of credit.

To comprehend the significance of fiduciary media, it is necessary to examine the nature of credit transactions.

Acts of exchange, whether direct or indirect, can be performed either in such a way that both parties fulfill their parts of the contract at the same time, or in such a way that they fulfill them at different times. In the first case we speak of cash transactions; in the second, of credit transactions. A credit transaction is an exchange of present goods for future goods.

Fiduciary media have grown up on the soil of the deposit system; deposits have been the basis upon which notes have been issued and accounts opened that could be drawn upon by checks. Independently of this, coins, at first the smaller and then the mediumsized, have developed into fiduciary media. It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or checks as a type of credit transaction and juristically this view is, of course, justified; but economically, the case is not one of a credit transaction.

According to the prevailing opinion, a bank which grants a loan in its own notes plays the part of a credit negotiator between the borrowers and those in whose hands the notes happen to be at any time. Thus in the last resort bank credit is not granted by the banks but by the holders of the notes.