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

242 Money, Bank Credit, and Economic CyclesTHE MAINTENANCE OF RESERVES EXCEEDING THE MINIMUMREQUIREMENTAnother complication which produces effects similar tothose covered in the preceding section takes place when bankshold cash reserves exceeding the minimum requirement. Thistends to occur at certain stages in the economic cycle in whichbanks behave relatively more prudently, or they are obliged toincrease their reserves due to difficulties in finding enoughcreditworthy borrowers willing to request loans, or both. Thisoccurs, for example, in the phases of economic recession thatfollow credit expansion. At any rate, the maintenance of cashreserves exceeding the necessary level reduces the system’scapacity for credit expansion in the same way as f, a percentageof the money supply which filters out of the banking system.37 D N =d= d(1 – f) = 1,000,000(0.85) = 5,666,667 m.u.f f 0.151 – fAnd the net credit expansion, x:x = D N – d = 4,666,667 m.u.Therefore we must conclude that if no portion of the money supplywere to filter out of the system (f = 0), and the banking authorities wereto eliminate the reserve requirement (c = 0), these authorities coulddrive the volume of credit expansion as high as they chose, since:D N =d0= ∞(This expansion would bring about numerous disruptive effects on thereal productive structure, on which its impact would be severe. Seechapter 5.)37 To illustrate how significantly the above factors can contribute to adecrease in the bank expansion multiplier, we must first note that inSpain, for instance, the total money supply consists of about 50 trillionpesetas (166.386 pesetas = 1 euro), which includes cash held by the