Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

172 Money, Bank Credit, and Economic Cyclesdo not result from any real increase in voluntary saving by socialagents. In this chapter we will concentrate on substantiating thisassertion and some of its implications and in subsequent chapterswill undertake the study of the economic effects of creditexpansion (the analysis of economic crises and recessions).To continue the pattern set in the first chapters, we willfirst consider the effects from an economic and accountingperspective in the case of the loan or mutuum contract. In thisway, by comparison, we will be better able to understand theeconomic effects of the essentially distinct monetary bankdepositcontract.2THE BANK’S ROLEASATRUEINTERMEDIARY IN THE LOAN CONTRACTLet us begin by supposing a banker receives a loan of1,000,000 monetary units (m.u.) from a customer. A true legalloan contract exists, stipulating that the customer is to give upthe availability of 1,000,000 m.u. in the form of present goods(money) he could have spent or keep it for himself, and thathe is to do so for a period of time or term (the essential elementof any loan contract) lasting one year. In exchange forthese present goods, the banker agrees to return after one yeara larger quantity than that originally received. If the agreeduponinterest rate is 10 percent, at the end of one year thebanker will have to return 1,100,000 monetary units. The followingbook entry is made when the loan is received:(1) Bank ADebitCredit1,000,000 m.u. Cash Loan received 1,000,000 m.u.(Input in the bank’s (Increase in liabilities)cash asset account)