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

The Credit Expansion Process 249The wealth banks have gradually accumulated can and mustbe returned to the citizens. Through a process of privatization,it should become available for different uses of great importanceto society (for example, to help pay off the national debt,or make a transition to a fully-funded private Social Securitysystem based on capitalization).The parallels between the issuance of unbacked banknotesand credit expansion backed by secondary deposits created exnihilo are now evident. Indeed all of the arguments offered inthe preceding pages hold true for banknotes as well as fordemand deposits. With that in mind, let us briefly consider afew entries. For example, when loans are granted against theissuance of banknotes:Bank A(59) Debit Credit1,000,000 Cash Banknotes 1,000,000900,000 Loans Banknotes 900,000In this case the bank grants loans from nothing by simplyissuing “false” bills and giving them to borrowers. In theworst of cases, if these borrowers return the bills to the bankto withdraw units of commodity money from the vault, thebank’s balance sheet will look like this:(60)Bank ABalance SheetAssetsLiabilitiesCash 100,000 Banknotes 1,000,000Loans 900,000Total Assets 1,000,000 Total Liabilities 1,000,000