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

The Credit Expansion Process 229a a== a = 1,000,0001 – r 1 – (1 – c) c 0.1= 10,000,000 m.u.As a=d=1,000,000 m.u. originally deposited, the totaldeposits would be indicated by the formula:[27] d = d1 – (1 – c) cThis formula is identical to the deposit multiplier in thecase of a single, monopolistic bank [14].Let us also remember that:[28] r = (1 – k) 1 – c1 + k(c – 1)In view of the fact that the banking system is in this casecomposed of small banks and k=0, if we substitute this value fork in formula [28], we obtain r=1-c=0.9, which we already knew.Therefore, an entire banking system comprised of smallbanks brings about a volume of deposits (10,000,000 m.u.) anda net credit expansion (9,000,000 m.u.) identical to those of amonopolistic bank for which k=1. These results are summarizedin Table IV-2.A system of small banks (where k=0) is clearly an exceptionwithin the overall banking system (where k is less than 1but greater than 0). However, it is an easy example to understandand therefore in textbooks is generally the model usedto explain the creation of credit money by the financial system.3030 See, for example, Juan Torres López, Introducción a la economía política(Madrid: Editorial Cívitas, 1992), pp. 236–39; and José Casas Pardo,Curso de economía, 5th ed. (Madrid, 1985), pp. 864–66.