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

218 Money, Bank Credit, and Economic Cyclesdeposits and brings about much greater credit expansion.Indeed, in this respect the fractional-reserve system produceseffects resembling those of a monopolistic bank. We will baseour demonstration on the most general case, a banking systemcomprised of a group of normal banks, each of which maintainscash reserves, c, of 10 percent. Also, on average, the customersof each fail to withdraw 20 percent of loans granted (or20 percent of fiduciary media return to the bank because a significantnumber of the final recipients are also clients of thebank). Hence, k=20 percent.Let us suppose that Mr. X deposits 1,000,000 m.u. in BankA. The bank would then make the following entry in its journal:Bank A(32) Debit Credit1,000,000 Cash Demand deposits 1,000,000(made by X)Bank A would then be able to create and grant loans to Zfor a sum determined by the formula in [3]. The followingentry would result:Bank A(33) Debit Credit1,097,560 Loans to Z Demand deposits 1,097,560And since k=0.2, 80 percent of loans granted would bewithdrawn, resulting in the following entry: