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

The Credit Expansion Process 251monetary units in the form of bills unbacked by originalmoney (gold or any other type of commodity money).We would have obtained the same result in the case of amonopolistic bank, one that enjoys the trust and business ofeveryone, with a reserve ratio, c, of 0.1 and a k of 1. In this casethe credit expansion, x, would be equal to:[42] x =d(1 – c)1 + k(c – 1)and when k = 1, x equals:d(1 – c) banknotes created ex nihilo.cIf we suppose that all the banks issue bills simultaneouslyand receive new original monetary units at the same rate, thenby maintaining its cash reserves unaltered, a single bank willbe able to generate banknotes equal to:d(1 – c)cThis is the same formula we applied to deposits. The followingentries will be made:Bank A(63) Debit Credit1,000,000 Cash Banknotes 1,000,0009,000,000 Loans and Unbacked banknotes 9,000,000other usesWe could also reproduce all of the accounting entries forthe more general case in which k > 0 (in our previous examplek = 0.2). If c = 0.1, then for each 1,000,000 m.u. a bank receives,it will be able to create from nothing new banknotes for a sumequal to:[43] d(1 – c)1 + k(c – 1)