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

246 Money, Bank Credit, and Economic CyclesWe have assumed the bank uses the counterfeit bills togrant loans, but it could use them for any purpose, for exampleto purchase any other asset (like lavish buildings) or simplyto pay day-to-day expenses. If the bank uses the bills togrant loans, its balance sheet will appear as follows:(56)Bank ABalance SheetAssetsLiabilitiesCash 1,000,000 Banknotes 10,000,000Loans 9,000,000Total Assets 10,000,000 Total Liabilities 10,000,000If people trust the bank, borrowers will agree to receivetheir loans in bills, which will circulate as if they were money.Under these conditions the banker may even believe, withgood reason, that no one will ever return these bills to thebank to withdraw the original money deposited. The momentthe banker decides this is the case, his judgment may manifestitself as an accounting entry identifying the 9,000,000 falsebills put into circulation by the bank as part of the year’sprofit, which the banker may freely appropriate. The followingjournal entries will be made:Bank A(57) Debit Credit1,000,000 Cash Banknotes 1,000,0009,000,000 Loans Banknotes 9,000,0009,000,000 Banknotes Profit 9,000,000