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

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The Credit Expansion Process 20520 percent; and that the sum of the original deposits, d, madein the bank is equal to 1,000,000 m.u.; then, by substitutingthese values into formula [3] we obtain:[4] x = 1,000,000 (1 – 0.1) = 1,097,560 m.u.1 + 0.2 (0.1 – 1)Therefore we see that a bank which accepts 1,000,000 m.u.in demand deposits, and which maintains a reserve ratio of 10percent and a k of 20 percent will be able to grant loans notonly for the sum of 900,000 m.u., as we assumed for the purposeof illustration in entries (18) and following, but for a considerablylarger amount, 1,097,560 m.u. Hence, even in thecase of an isolated bank, the capacity for credit expansion andex nihilo deposit creation is 22 percent greater than we initiallysupposed in entries (18) and following. 23 As a result, weshould modify our earlier accounting entries to reflect that, inkeeping with the Anglo-Saxon accounting system, when c=0.1and k=0.2, the bank will be able to expand its credit by1,097,560 m.u., instead of the 900,000 we assumed before (thatis, the bank’s capacity for credit expansion is 22 percentgreater). The modified journal entries and corresponding balancesheet would appear as follows (compare with initialentries 18 and 19):23 Even though, from the standpoint of an isolated bank, it appears as ifthe bank were loaning a portion of its deposits, the reality is that evenan isolated bank creates loans ex nihilo for a sum larger than that originallydeposited. This demonstrates that the principal source of depositsis not depositors, but rather loans banks create from nothing. (Depositsare a secondary result of these loans.) This will be even clearer when westudy the overall banking system. C.A. Phillips expresses this fact bystating, “It follows that for the banking system, deposits are chiefly theoffspring of loans.” See Phillips, Bank Credit, p. 64, and the quotationfrom Taussig in note 63, chapter 5.
206 Money, Bank Credit, and Economic CyclesBank A(23) Debit Credit1,000,000 Cash Demand deposits 1,000,000(checking accounts)1,097,560 Loans granted Demand deposits 1,097,560(newly-created deposits)These entries correspond to an original deposit of1,000,000 m.u. and an isolated bank’s ex nihilo creation of loansand deposits for the sum of 1,097,560 m.u. The value of k (0.2)indicates that, on average, borrowers only withdraw 80 percentof the funds they are lent. When this withdrawal is made(and even if a greater amount is withdrawn, when some of thefinal recipients of the money are also customers of the originalbank and deposit their money there), the following entry isrecorded: 2424 Former continental accounting methods are more complex. However,it is possible to arrive at balance sheet (25) by supposing that the statementk=0.2, instead of referring to the percentage of loan funds unused(which, as we know, this system does not reflect), represents the proportionof the public which does business regularly with the bank andtherefore will deposit funds back into it. In this case, the entries wouldappear as follows:Bank A(26) Debit Credit1,000,000 Cash Demand deposits 1,000,000Upon loaning 900,000 m.u., the bank would make the following entry:Bank ADebitCredit900,000 Loans Cash 900,000
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MONEY,BANK CREDIT,ANDECONOMIC CYCLE
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CONTENTSPREFACE TO THE THIRD ENGLIS
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xiiMoney, Bank Credit, and Economic
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xivMoney, Bank Credit, and Economic
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xviMoney, Bank Credit, and Economic
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xviiiMoney, Bank Credit, and Econom
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PREFACE TO THESECOND ENGLISH EDITIO
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Preface to the Second English Editi
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PREFACE TOTHE THIRDSPANISH EDITIONI
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Preface to the Third Spanish Editio
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xliiMoney, Bank Credit, and Economi
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INTRODUCTIONThe economic analysis o
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Introductionxlviiand foreign exchan
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IntroductionxlixThis book comprises
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Introductionrecurrent phenomenon. I
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Introductionand Professors Hans-Her
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2 Money, Bank Credit, and Economic
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6ADDITIONALCONSIDERATIONSON THE THE
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Additional Considerations on the Th
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7A CRITIQUE OFMONETARIST ANDKEYNESI
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A Critique of Monetarist and Keynes
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8CENTRAL AND FREEBANKING THEORYThis
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Central and Free Banking Theory 603
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9A PROPOSAL FOR BANKINGREFORM: THE
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A Proposal for Banking Reform:The T
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BIBLIOGRAPHYAbrams, M.A., Money in
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Bibliography 815Bajo Fernández, M.
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Bibliography 817Borch, K.H., Econom
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Bibliography 819Coronel de Palma, L
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Bibliography 821N. Durlauf and Lawr
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Bibliography 823Galiani, F., Della
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Bibliography 825Graham, F.D., “Pa
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Bibliography 827——, Prices and
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Bibliography 829translation by N. K
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Bibliography 831——, “Keynes
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Bibliography 833Russian edition by
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Bibliography 835Keeler, J., “Empi
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Bibliography 837——, “On Crisi
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Bibliography 839——, “Professo
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Bibliography 841Miller, H.E., Banki
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Bibliography 843Neira, Alonzo, M.A.
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Bibliography 845Raguet, C., “Repo
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Bibliography 847——, “The Myth
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Bibliography 849——, “Banking
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Bibliography 851M.C. Marcuzzo (Chel
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Bibliography 853——, “A Critiq
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Bibliography 855Walker, A., The Sci
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INDEX OF SUBJECTSAccelerator princi
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Index of Subjects 859Banking reform
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Index of Subjects 861objection to t
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Index of Subjects 863Goal, concept
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Index of Subjects 865See also Fract
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Index of Subjects 867Plan, definiti
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Index of Subjects 869Tragedy of the
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