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

The Credit Expansion Process 259(71)Bank ABalance Sheetc=0.1, k=0 and f=0AssetsLiabilitiesCash 1,000,000 Deposits 10,000,000Losses for the 9,000,000yearTotal Assets 10,000,000 Total Liabilities 10,000,000If we compare this balance sheet with (69), we see the bankholds the same amount in cash reserves in each instance, yet avery significant difference exists: in (71) the Liabilities columnreflects 10,000,000 m.u. in deposits, as opposed to 1,000,000m.u. in (69). In other words, the bank has technically failed. Neverthelessas long as depositors continue to trust it, no decreasein the money supply will take place. In fact, since no one willclaim the 9,000,000 m.u. of secondary deposits the bankerscreated from nothing, they may even consider this amountpart of the year’s profits, a sum to compensate for the9,000,000 m.u. lost to defaulters, leaving the balance sheet as itappears in (69). 42 However in terms of deflation this situationis obviously even more dangerous than that following therepayment of a loan: before arriving at this situation, bankswill heavily restrict new loans (they will be much more rigorousin their criteria for granting them), accelerating the deflationaryprocess; and if the measures they take do not provesufficient to avoid defaulters and the risk of failure, they will42 It is interesting to note how bankers involved in crises invariablycomplain that with just a little assistance from someone (the state or thecentral bank) in restoring their customers’ confidence, they could continueto function with no problem and quickly reestablish their “solvency.”