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

The Credit Expansion Process 189indicates we are faced with a radically different economicevent, one that involves the creation ex nihilo of 900,000 m.u. offiduciary media or derivative deposits when the bank loans 90percent of the money it has in its vault.In addition it is important to understand clearly that if thebank uses the money to grant a loan to Z, as we have supposedin our example and is usually the case, this loan doesentail the exchange of present goods for future goods, thoughit is not backed anywhere in the market by a necessary, previousincrease of 900,000 m.u. in voluntary saving. Indeed, the bankcreates from nothing money it loans to Z in the form of presentgoods, while no one has been first obliged to increase hissavings by the amount of the loan. Mr. X, the original depositor,continues to subjectively believe he possesses the fullavailability of the 1,000,000 m.u. he deposited in the bank; thatis, he thinks he has at his disposal 1,000,000 m.u. of a completelyliquid asset (money). At the same time, Borrower Zreceives for his investments 900,000 m.u. of new liquiditywhich has not come from anyone’s savings. In short, two differentpeople simultaneously believe they have at their fulldisposal the same liquid asset of 900,000 m.u., which correspondto the portion of the deposit of 1,000,000 m.u. which thebank loaned to Z (derivative deposit). At this point it is obviousbanks generate liquidity which is invested without anyprior saving. This phenomenon constitutes the main cause ofrecurring economic crises and recessions, and we will examineits crucial economic importance in the following chapters.Once the bank has given the loan to Z, the bank’s balancesheet appears as follows:(12) Bank ABalance Sheet(End of the year)AssetsLiabilitiesCash 100,000 Demand deposit 1,000,000Loans granted 900,000Total Assets 1,000,000 Total Liabilities 1,000,000