This in turn will permit more consumption and more savings, and in turn will permit the expansion of the pool of real funding. In the process of real wealth generation, banks fulfill a role of the intermediary. They facilitate the flow of real funding by introducing suppliers of real funding to the demanders for real funding. The introduction of money to our analysis will not alter the fact that the subject matter remains the pool of means of sustenance or the pool of real funding. As long as the money stock remains constant the volume of credit will be dictated by the size of the real pool of funding.
Trouble however erupts whenever the central bank and the fractional reserve banking are introduced.
This type of credit produces the same effect as a counterfeit money does, which is consumption of goods without production, or an exchange of nothing for something. Once the unbacked credit is generated it creates activities that free market wouldnever approve, i.e. these activities are consuming and not producing real wealth. This in turn sets in motion the shrinkage in the real pool of funding. Consequently, performance of various activities starts to deteriorate and bank's bad loans start to rise. In response to this, banks begin curtailing their lending activities and credit crunch is emerging.