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

The Credit Expansion Process 197of wealth to bankers persists as long as the banking businesssuffers no disruptions and assets keep increasing bankers’ balancesin the form of loans and investments backed by the correspondingdeposits created from nothing. The full recognitionof this never-ending source of financing and of theenormous wealth banks have accumulated to the detriment ofother citizens (which still contribute to the banks’ balances, disguisedas active investments backed by “deposits”) will provevery important in the last chapter 9 (pp. 791ff.), when we proposea model for changing and reforming the current bankingsystem. Though these funds in fact only benefit banks and governments,and though from an economic and accountingstandpoint they belong to alleged depositors, in all reality theydo not belong to anyone, since these depositors view theirdeposits as perfect money substitutes. Therefore, as we will seewhen we study the process of banking reform, these resourcescould be used to pursue important goals in the public interest.Such goals might include eliminating the remaining publicdebt or even financing a process of social-security reform toaccomplish a transition from a pay-as-you-go public system toan entirely funded private system based on capitalization.Let us return now to our example. As Borrower Z graduallyuses his money by writing checks on the account openedfor him by the bank, the two banking systems, the Anglo-Saxon and the Continental, would begin to reflect the bank’saccount records in an increasingly similar way. Let us supposethe borrower withdraws his loan in two portions, one on eachof two separate, consecutive occasions. On the first occasion(t 1 ) he withdraws 500,000 m.u., and on the second (t 2 ), 400,000m.u. The accounting entries would appear as follows:Bank A (t 1 )(20) Debit Credit500,000 Demand deposits Cash 500,000(part of the loanwithdrawn by Z)