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

The Credit Expansion Process 231Depending upon the text, the author refers either to a systemof tiny banks or to a single, monopolistic bank (or one whosecustomers are the final recipients of the loans it grants). 316A FEW ADDITIONAL DIFFICULTIESWHEN EXPANSION IS INITIATED SIMULTANEOUSLY BY ALL BANKSIn light of the fact that in this context we are forced to offera simplified view of the processes of credit expansion, it isnow necessary to make a few supplementary points and clarifications.To begin with, the expansion process we havedescribed originates entirely from an increase in moneydeposited at the original bank (in our example, d represents1,000,000 m.u. deposited in Bank A). Nevertheless, both historically,as banking developed, and currently, all processes ofcredit expansion have been characterized by the fact that thenew money reaches the banking system not through one singlebank, but through many (if not, to a larger or smallerextent, through all the banks in the system). As Richard G.Lipsey reveals, 32 credit expansion such as we havedescribed, which takes place ex nihilo and is backed by thecreation of the necessary bank deposits, will recur as often as1,000,000 m.u. are deposited in any of the different banks. Therefore,the widespread expansion process is, in practice, much moresubstantial and qualitatively more complicated, since it originatessimultaneously at many banks and from many deposits. In ourexample alone, which involved a reserve ratio of 10 percent,loans for the sum of 9,000,000 m.u. were ultimately created,an amount nine times larger than the original deposit, and asa result the total money supply was multiplied by ten. Themain conclusion to be drawn is that if all banks simultaneouslyreceive new deposits of money, they will be able to31 This is the example Bresciani-Turroni prefers to follow in his book,Curso de economía, vol. 2, pp. 133–38.32 Richard G. Lipsey, An Introduction to Positive Economics, 2nd ed. (London:Weidenfeld and Nicolson, 1966), pp. 682–83.