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

236 Money, Bank Credit, and Economic CyclesTherefore, the balance sheet of each bank would coincidewith the one we discovered when we assumed k was equal toone (a monopolistic bank or one whose clients are the ultimaterecipients of the loans it grants). This is due to the fact thatalthough in this case there is no monopoly, the loss of casheach bank initially experiences upon expanding credit is eventuallyoffset by deposits originating in loans expanded by theother banks.We may conclude from balance sheet (53) that each bankerneed not reduce his cash reserves to expand his bank’s credit;instead, if the rest of his colleagues expand their credit at thesame time, he can maintain his level of cash reserves unalteredand proceed directly to grant loans for a sum equal to a multipleof his reserves. (In our case, each banker holds 1,000,000m.u. in cash reserves and creates from nothing 9,000,000 m.u.in loans backed by 9,000,000 m.u. in secondary deposits.)Therefore Rothbard’s interpretation of the process is correcteven in the case of an isolated bank, when each of the otherbanks in the system also receive original deposits (that is, aproportional amount of the new money created in the system)and all expand their credit simultaneously. The cash eachbank would theoretically lose by granting loans is counteractedby deposits received from recipients of loans expandedby the banker’s colleagues. Thus each bank can alone expandits credit for the sum of 9,000,000 m.u. In turn, the system’stotal expansion would be equal to 90,000,000 m.u., and theamount of total deposits or the money supply would be100,000,000 m.u.We can achieve numerical results identical to those inTable IV-2 simply by supposing that an original deposit of1,000,000 m.u. is made at Bank A and is divided equallyamong the ten banks in the system, each of which receives100,000 m.u. Those 100,000 m.u. would remain unaltered ineach bank’s vault. Each bank could expand its credit by900,000 m.u., and therefore the entire banking system couldgenerate 9,000,000 m.u. in new loans and a total of 10,000,000m.u. in primary and secondary deposits.Obviously this last example, which wraps up our accountinganalysis of the expansion of loans and deposits by isolated