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

204 Money, Bank Credit, and Economic Cycleslarger their subsequent market share, the greater the possibilitythat the citizens who receive the banks’ fiduciary mediawill be their own customers. Therefore both k and the correspondingcapacity to create loans and deposits from nothingwill be increased and the resulting profit much greater. Thevalue of k is also increased when monetary deposits are madein other banks, which in turn expand their loans, and theirborrowers ultimately deposit in the original bank a significantportion of the new money they receive. This phenomenon alsocauses an increase in the bank’s monetary reserves and thereforein its capacity for credit expansion.For example, if we suppose that the reserve ratio orrequirement, c, is 10 percent; that the proportion of loanswhich remain unused, k (which also includes the effects of alarger number of bank customers, as well as other factors), isthey suffer as a result of their violation, via the corresponding state privilege,of the essential principles behind the monetary irregular-depositcontract. One advantage banks gain from mergers and acquisitions isthe ability to establish centralized cash reserves, which are kept availablefor fulfilling withdrawal requests at any location where a higherthan average number of them may be made. In a market where manybanks operate, this benefit is lost, since each bank is then obliged tomaintain separate, relatively higher cash reserves. Public authoritiesalso urge rapid mergers, because they hope it will make it easier forthem to prevent liquidity crises, implement monetary policy and regulatethe banking industry. We will later analyze bankers’ persistentdesire to increase the volume of their deposits, since as the formulashows, the sum of deposits forms the basis for the multiple expansion ofloans and deposits, which banks create ex nihilo and from which theyderive so many benefits. On bank mergers, see Costantino Bresciani-Turroni, Curso de economía política, vol. 2: Problemas de economía política(Mexico: Fondo de Cultura Económica, 1961), pp. 144–45. In any case, itis important to recognize that the irresistible bank-merger processresults from state interventionism in the field of finance and banking, aswell as from the privilege that allows banks to operate with fractionalreserves on demand deposits, against traditional legal principles. In afree-market economy with no government intervention, where economicagents are subject to legal principles, this continual trend towardbank mergers would disappear, banks’ size would be practically immaterialand there would be a tendency toward a very high number ofentirely solvent banks.