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

238 Money, Bank Credit, and Economic Cyclesaccount books that deposits back the wealth bankers appropriateupon expanding their credit. From an accounting (butnot a legal) standpoint, the formal ownership of these loanscorresponds to the deposit-holders. But in practice, sinceunder normal circumstances they consider their depositsmoney (perfect money substitutes) that they can use in theirtransactions without ever having to withdraw them in physicalmonetary units, it is clear that the assets generated by thebanking system do not actually belong to anyone. To a largeextent, however, they could be considered the property ofbanks’ shareholders, directors and administrators, the peoplewho actually take advantage of many of the economic benefitsof this wealth, with the additional advantage of not appearingas the owners, since the account books indicate that the depositorsown the wealth.In other words, under normal conditions, deposits comefrom loans and are merely a secondary result, reflected in theaccount books, of the wealth banks accumulate and retainindefinitely. We will return to this topic later in the book, in adiscussion on banknotes and in the last chapter, where wepresent our proposal for a process of banking reform.banks and many original deposits, and considering that these banksexpand credit simultaneously, the deposits of each individual bank arealso a result of the credit expansion carried out by all of the banks in unison.In chapter 8 we will examine the distinct possibility (denied by Selgin)that, even in a free-banking system, all banks might simultaneouslyinitiate credit expansion, even when the volume of primary depositsdoes not increase in all of them (that is, through a generalized decreasein their cash or reserve ratio). In the same chapter, we will explain, asMises has done, that in a free-banking system, any bank which unilaterallyexpands its credit by reducing its cash reserves beyond a prudentlevel will endanger its own solvency. These two phenomena account forthe universal tendency of bankers to agree among themselves to jointlyorchestrate (usually through the central bank) a uniform rate of creditexpansion.