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

The Credit Expansion Process 209This means borrowers immediately withdraw the entireamount of their loans, and those to whom they make paymentsare not customers of the same bank as the borrowers. If k=0,then by substituting this value into formula [3] we obtain formula[5]:[5] x = d(1 – c)And since in our example d = 1,000,000 m.u. and c = 0.1,then:x = 1,000,000(1 – 0.1) = 1,000,000 . 0.9 = 900,000 m.u.This is precisely the sum of deposits or fiduciary mediacreated ex nihilo which appears in entries (11) and (18). Nevertheless,we saw in the last section that in practice, even if k isonly slightly larger than 0, an isolated bank can create a considerablylarger amount of fiduciary media. (If k=0.2, it cancreate 22 percent more, or 1,097,560 m.u. instead of the 900,000m.u. in the first example.) This is true whether the bank usesthe continental accounting system or the Anglo-Saxon system,and the sum created may even exceed the total of originaldeposits in the isolated bank.With this in mind, it is easy to understand why banks competeas fiercely as they do to attract the largest possible numberof deposits and customers. Bankers try to obtain as muchmoney as possible in the form of deposits, because they arecapable of expanding credit for an even greater amount thanthe volume of their deposits. Thus, the greater the volume, themore the bank will be able to expand the corresponding credit.Bankers try to attract as many customers as they can, becausethe more customers they have, the larger k will be; and thelarger k is, the greater their capacity to expand loans and generatedeposits. Most importantly, bankers are technicallyunable to discern whether their growth policies lead to abroadening of their individual spheres of activity at theexpense of other banks, or whether their policies ultimatelyresult in a generalized increase in credit expansion involvingthe entire banking system, or whether both occur at once.