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

The Credit Expansion Process 239FILTERING OUT THE MONEY SUPPLYFROM THE BANKING SYSTEMAnother complexity derives from the fact that in reality, eachtime loans are granted and deposits are created and withdrawn,a certain percentage of the money supply “filters” out of thesystem and is kept by individuals who do not wish to depositit in a bank. The larger the percentage which physically “filters”into the pockets of individuals at each stage and remainsoutside the banking system, the smaller the bank’s expansivecapacity to generate new loans.In a system of small banks (in which k = 0) with a reserverequirement of 10 percent (c = 0.1), if f refers to the proportionof the money supply that filters out of the banking system andf = 0.15, then when Bank A loans 900,000 m.u., the amount ofmoney which would return to the banking system would beequal to (1 – f) 900,000 = (1 – 0.15) 900,000 = 0.85 x 900,000 =765,000 m.u. Therefore if we are dealing with a system ofsmall banks and we assume that k=0, c=0.1 and f=0.15, we canuse the following formulas:If D N refers to the total net deposits, which are comprisedof gross deposits, D G , minus the total sum of money, F, that filtersout of the banking system, then:[29] D N = D G – FThe total sum of money that filters out of the banking systemwill logically be equal to f times the total sum of grossdeposits, D G , where f is the percentage of money which filtersout of the system. That is:[30] F = fD GIn turn, the amount of money initially deposited is equalto the sum of net deposits multiplied by the correspondingreserve ratio plus the total sum which has filtered out of thesystem:[31] d = D N. c + F