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

The Credit Expansion Process 243DIFFERENT RESERVE REQUIREMENTS FOR DIFFERENTTYPES OF DEPOSITSFinally, another complication we could consider derivesfrom the fact that in many countries the reserve requirementfor demand deposits differs from the requirement for timedeposits, even though as we know, in practice the latter areoften true demand deposits. Although the formulas we haveconsidered up until now could be worked out again for bothdeposit types, the degree of complexity involved would not beworth the slight additional value the analysis could afford, sowe have chosen not to do so here. 38public, demand deposits, savings deposits and time deposits. (In theSpanish banking system, despite their name, time deposits are usuallytrue demand deposits, because they can be withdrawn at any time withoutpenalty or with a very small penalty). Of the total money supply,only about 6.6 trillion pesetas are in the form of cash in the hands of thepublic. This means that a little over 13.2 percent of the total correspondsto this cash held by the public, and therefore the bank expansion multiplierin Spain would be greater than 7.5 times (which would be equal toa reserve ratio of 13.2 percent). Since the current reserve requirement inSpain is 2 percent (from the Bank of Spain’s monetary circular 1/1996,October 11, and confirmed afterward by European Central Bank regulations),the difference between that and 13.2 percent can be attributed tothe influence of f, the percentage of money which filters out of the systemand into the pockets of private citizens. Perhaps the past economicrecession has played a role by increasing the volume of cash anddeposits held by banks and temporarily reducing their potential forboosting credit expansion. Our comments are based on provisional datafrom June published in August 1994 in the Boletín Estadístico del Banco deEspaña, kindly supplied by Luis Alfonso López García, an inspectorfrom the Bank of Spain.38 Nevertheless, the relevant formulas are devised in Laurence S. Ritterand William L. Silber, Principles of Money, Banking and Financial Markets,3rd rev., updated ed. (New York: Basic Books, 1980), pp. 44–46. Otherwritings which cover in detail the formulation of the bank multipliertheory are: John D. Boorman and Thomas M. Havrilesky, Money Supply,Money Demand and Macroeconomic Models (Boston: Allyn and Bacon,1972), esp. pp. 10–41; Dorothy M. Nichols, Modern Money Mechanics: AWorkbook on Deposits, Currency and Bank Reserves, published by the FederalReserve Bank of Chicago, pp. 29–31; and the interesting book by