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

The Credit Expansion Process 211Reserve ratio “c”Percentage of loans unused “k”k =c1 – c(x = d = 1)2 percent 2.04 percent5 percent 5.26 percent7 percent 7.52 percent13 percent 14.94 percent15 percent 17.64 percent17 percent 20.48 percent20 percent 25.00 percentCREDIT EXPANSION AND EX NIHILO DEPOSITCREATION BY A SOLE, MONOPOLISTIC BANKLet us now suppose that k=1. We are dealing either with asole, monopolistic bank in which borrowers are obliged,because there is no other, to maintain as deposits all fundsthey are lent; or a situation exists in which all final recipientsof payments made by borrowers of the bank are also clients ofthe bank. (This “ideal” goal would be reached at the merger ofall remaining megabanks.) When we substitute the value k=1into formula [3], we obtain:[6] x =d (1 – c)cReturning to our example in which d=1,000,000 m.u. andc=0.1, if we substitute these values into the formula, weobtain:[7] x = 1,000,000 (1 – 0.1) = 1,000,000 . 0.9 =900,000 = 9,000,000 m.u.0.1 0.1 0.1In this case, the bank could alone create ex nihilo loans anddeposits or fiduciary media for the sum of 9,000,000 m.u.,which means it could multiply its total money supply by ten(1,000,000 m.u. originally deposited, plus 9,000,000 m.u. in theform of fiduciary media or deposits created from nothing toback the loans granted by the bank).