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

The Credit Expansion Process 241now to determine the total volume of deposits and the totalcredit expansion:[38] D N = d 1,000,000=c 0.1= 10,000,000and[39]x =d– d = d(1 – c) = 1,000,000(0.9) c c 0.1= 9,000,000Let us see to what value credit expansion is reduced if, asbefore, d = 1,000,000 m.u. and c = 0.1, while in addition 15 percentof the money supply filters out of the banking system (f =0.15).[40]D N = 1,000,000 = 1,000,000 0.85 x 1,000,000=0.1 + 0.15 0.1 + 0.15 0.085 + 0.151 – 0.15 0.85=850,000 = 3,617,0210.235Hence, in a banking system where 15 percent of the moneysupply filters out of the system, the total sum of depositswould be 3,617,021 m.u., instead of 10,000,000 m.u., as is thecase when f = 0.The net credit expansion would be equal to x = 3,617,021 -1,000,000 = 2,617,021, instead of the 9,000,000 m.u. which arecreated when no money filters out of the system. Therefore,when the percentage of money which filters out is greater thanzero, the capacity of the banking system to create loans andgenerate deposits ex nihilo decreases noticeably. 3636 We have arrived at these formulas following the process described byArmen A. Alchian and William R. Allen in University Economics (Belmont,Ca.: Wadsworth Publishing, 1964), pp. 675–76. If the legal reserverequirement were reduced to zero, as is increasingly demanded, thetotal sum of net deposits, D N , would be: