Money incomes are thus in essence claims to wealth. They can arise in first instance only because wealth has somewhere been produced. The totality of money incomes cannot exceed the total money value of the wealth produced because otherwise we should have to assume that there can be divided up more than actually exists. The use of money complicates the process of wealth distribution, but fundamentally it does not alter the fact that what we really have going on is a dividing up of all the economic goods that have been produced among those who have in some way contributed to their production.

Money income, as we know, can be "spent" or "saved." By spending we usually mean devoting the money income to the purchase of "consumption goods" - goods which directly satisfy human wants and which leave nothing behind them except effects on the consumer. By "saving" we mean the withholding of the money from the purchase of consumption goods. The money saved is then either hoarded, or is directly invested by the owner himself, or it is put into some kind of a savings institution. Hoarding money, however, represents the segregation of a part of the community's capital and the reduction of such capital to utter uselessness. It is analogous to the locking up of a machine of great potential productive powers. Investing the saved money or putting it into a bank or a regular savings institution is like coupling the machine to the engine - it utilizes the potential capacity of the money saved as a further agent in production.

The money deposited in banks does not, of course, lie idle. It was shown before that money so deposited adds greatly to the lending power of the banks. What the bank lends is simply its own credit, but that is supplied in forms that are readily acceptable to borrowers and to those with whom the borrowers have business dealings. These borrowers are men of business who are engaged in starting new enterprises, in enlarging old ones or simply in maintaining established lines of production on their wonted basis. They borrow for a purpose and that purpose is normally to gain control of a part of the community's wealth that is available for use in further production. In other words, business men "invest" the funds that they borrow and that means simply that they expend them for purposes of further production. Unless the funds borrowed were productively employed it is obvious that no interest could be paid. Borrowing $100 at 5 or 6% interest per annum and locking the money in a safe for a year would be adjudged by all a most foolhardy undertaking. But when the borrowed funds are used for the purchase of additional raw material, new machinery, etc., there is normally available at the maturity of the debt a sum of wealth which more than repays both the principal and the interest.

Money incomes are based on wealth

Incomes may be spent or saved

Money deposited in banks is used

The funds that the bank supplies are not themselves capital. The bank cannot by multiplying loans increase society's fund of capital. But these funds are unquestionably a means of obtaining control of capital. The actual capital involved is supplied by the seller who accepts in payment for his goods the bank check or the bank notes. The seller's willingness to accept these instruments is based on his confidence in the solvency of the bank and in the willingness of his own creditors to accept similar means of payment in the liquidation of his indebtedness to them. Thus as long as the bank's credit is unshaken the funds that it supplies are in the hands of the holder equivalent to so much liquid capital. Through the creation of these funds the borrower gets control of capital goods which presumably he could not otherwise have obtained. Similarly the maker of the capital goods purchased by the borrower finds a customer for whom he might otherwise have looked in vain. But more important still from the social point of view, capital goods that were created but which stood idle have been taken and have been put to productive use. Through its creation of loanable funds the bank has thus made possible the speedy transfer of capital goods from the maker to the user, from him who has no use for them to him who has a use. It may therefore be concluded that the banks through their influence on the investment of saved income stimulate the creation of capital goods and through their creation of loanable funds promote the prompt utilization of these goods.

Bank credit not itself capital but a means of obtaining capital

Banks also release to the entrepreneur capital tied up. Much of what was said above is apropos here, but the point now raised goes even deeper. It concerns the basis of the funds created by the banks. It will be seen that banks virtually coin into a generally acceptable, liquid medium of exchange many forms of wealth which could not themselves pass current as media.

In the first place banks make advances on some kinds of wealth in hand. The circumstances governing the selection of the kinds of wealth acceptable as security for the creation of demand obligations were sufficiently discussed in a previous chapter. Suffice it here to repeat that only those forms of wealth are satisfactory for which there is a constant and an open market. The less certain the market is for any form of wealth the less available such wealth is as security for bank loans. But for forms of wealth like stocks and bonds, warehouse receipts for cotton, wheat, etc., the market is open and continuous, and within certain limits the commercial bank whose obligations are almost all payable on demand finds it possible to make credit advances upon them. Savings banks and similar institutions make advances on land security and on other forms of relatively less liquid possessions. In any case what we have in these credit advances is the virtual coining, into a generally acceptable exchange medium, of forms of property that would otherwise represent wealth definitely fixed. In the absence of an opportunity to use such wealth as security for a loan the individual owner could release the sum involved only by selling the property and thus by foregoing its use altogether. The use of wealth as a basis for a loan is in a sense "eating one's cake and having it too."