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

202 Money, Bank Credit, and Economic Cycles(1 – k)x + ckx = d – cdx(1 – k + ck) = d(1 – c)Therefore the maximum credit expansion, x, an isolatedbank could bring about ex nihilo would be: 20x =d (1 – c)1 – k(1 – c)20 Significantly, however, Ludwig von Mises, in his important theoreticaltreatises on money, credit and economic cycles, has always resisted basinghis analysis on the study of the credit expansion multiplier we havejust worked out in the text. These writings of Mises all focus on the disruptiveeffects of creating loans unbacked by an increase in actual saving,and the fractional-reserve banking system which carries out suchloan creation by generating deposits or fiduciary media. Mises’s resistanceto the multiplier is perfectly understandable, considering the aversionthe great Austrian economist felt to the use of mathematics in economicsand more specifically to the application of concepts which, likethe bank multiplier, may be justly labeled “mechanistic,” often inexactand even deceptive, mainly because they do not take into account theprocess of entrepreneurial creativity and the evolution of subjective time.Furthermore, from the strict viewpoint of economic theory, it is unnecessaryto work out the multiplier mathematically to grasp the basic conceptof credit and deposit expansion and how this process inexorably provokeseconomic crises and recessions. (Ludwig von Mises’s chief theoreticalgoal was to arrive at such an understanding.) Nevertheless thebank multiplier offers the advantage of simplifying and clarifying theexplanation of the continual process of credit and deposit expansion.Therefore, for the purpose of illustration, the multiplier reinforces ourtheoretical argument. The first to employ the bank multiplier in a theoreticalanalysis of economic crises was Herbert J. Davenport in his book,The Economics of Enterprise, (esp. chap. 17, pp. 254–331) a work we havealready cited. Nonetheless F.A. Hayek deserves recognition for incorporatingthe theory of the bank credit expansion multiplier to the Austriantheory of economic cycles (Monetary Theory and the Trade Cycle, pp.152ff.). See also note 28, in which Marshall, in 1887, provides a detaileddescription of how to arrive at the most simplified version of the bankmultiplier formula.