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

The Credit Expansion Process 233approach of Rothbard and others is totally correct lies in thefact that for our purposes it makes no difference whether westudy the case examined up to this point (an original deposit,extended throughout the banking system, of 1,000,000 m.u. inBank A), or we consider a banking system comprised of tenbanks, each of which simultaneously receives a deposit of100,000 m.u. (i.e., a total of 1,000,000 m.u. divided among tenbanks). In the latter case, each bank will keep unaltered100,000 m.u. in cash, making it possible for the banks toexpand their loans and create ex nihilo new fiduciary media forthe sum of 900,000 m.u. Each bank will be able to maintain stablecash reserves of 100,000 m.u. if possible reductions in thesereserves as the result of loans granted are offset by newdeposits originating from loans made by other banks. Thereforeif all of the banks bring about expansion simultaneously,each one is able to maintain its cash reserves unaltered, andwith a reserve ratio of 0.1, create from nothing, in the form ofloans backed by new fiduciary media, up to nine times its initialdeposits. Let us examine this process of simultaneousexpansion in terms of accounting entries.We will assume that each of ten banks receives 1,000,000m.u. in new, original deposits of money. The ten banks are allof the same size, and each has a reserve ratio, c, of 10 percent,and (to keep it simple) a k equal to zero. Let us also supposethat each bank has a market share of 10 percent. In otherwords, each bank receives the business of 10 percent of allthe customers in the market in which it operates. Moreover,these customers are randomly distributed. If these bankssimultaneously begin to expand credit according to theprocess described in entries (42) and following, it is obviousthat any one of them, for example Bank A, will eventuallyreceive deposits coming from loans granted by the otherbanks, as shown in Table IV-2. If all of the banks expandcredit simultaneously, Bank A’s journal entries would appearas follows: