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

The Credit Expansion Process 237banks and banking systems, is the most realistic. In the currentmonetary system, increases in the money supply filterthroughout the system and reach practically all banks, permittingthem to expand their credit simultaneously accordingto the processes we have studied. In addition, there are clearhistorical indications that banks have never emerged alone,but in groups. Even Saravia de la Calle mentions that bankersestablished themselves in groups, offering “guarantors andacting as guarantors for each other.” 34 This means that by thetime of the sixteenth-century Castilian markets, bankers werealready aware of the intimate relationship and strong communityof interests uniting them in terms of the success or failureof their businesses, and they realized they needed to supportone another mutually.With respect to the gold standard and a money supplybased on the discovery of new gold mines and on the developmentof extraction techniques, we can assume that newmoney originating from substantial, new discoveries wouldinitially reach only a few bankers, and from there it wouldextend throughout the rest of the banking system. Therefore,it would not set off a process of simultaneous expansion, buta gradual process by which the money would filter throughoutthe entire system.We can conclude that if there are many banks and manynew deposits, and the banks expand their credit simultaneouslyfollowing the processes we have studied, even an isolatedbank will be able to maintain a stable level of reservesand by itself expand loans and deposits for a multiple of thislevel, an amount determined by the inverse of the reserveratio (when k=0). 35 Therefore it is obviously only in the34 Saravia de la Calle, Instrucción de mercaderes, p. 180.35 Under these circumstances, which most closely resemble actual marketconditions, Phillips’s statement loses credibility. In his words (CreditBanking, p. 64), “It follows for the banking system that deposits arechiefly the offspring of loans. For an individual bank, loans are the offspringof deposits.” This second affirmation is the incorrect one undertrue conditions. This is due to the fact that, given the existence of many