The Bismarck tribune. [volume] (Bismarck, N.D.) 1916-current, 1934-12-05

create deposits up to an amount many
times this reserve. Such q conclu-
sion seems to find support in the fact
that, together, all the banks may have
deposits many times the total Of cur
rency actually in existence. It IS the
purpose Of this article to show that no
such magical process Of credit manu.
3acture IS possible-that, as q rule, q
bank can lend money only slightly
more than the amount of its excess
reserves Chose rot required to be kept
rs q safeguard to depositors).
When Loans Are Made
This may be seen by considering
briefly just what happens when loan
is made. It is true that the banker
seldom Immediately gives the borrow
er q roll OF bills, but instead credits
his account with the amount Of the
Joan. The net effect, however, Is very
much as though cash had been paid
out, for naturally the borrower
promptly checks against his borrowed
deposit" and he may be expected, on
the average. during the period of his
loan, to use the bulk Of his borrow
1ngs. The banker may thus safely
make loans and create" deposits only
# he has excess reserves, which he is
prepared to lose when the borrowers
checks come In for payment, to an
amount nearly as large as the loans.
A certain small amount Of each loan
does. on the average. remain on de-
post, unused, allowing the banker
safely to make loans somewhat larger
than the amount Of cash which he is
prepared to lose. It has been estimat-
ed that normally the average unused
balance will not exceed 20 per cent Of
the loan. II we use this figure, the
banker can lend about one-fourth
again as much as he could actually
pay out in cash. Finally, 1t must be
remembered, that not all the cash
which the bank receives can be paid
out. The banker must keep q reserve
Of approximately 10 per cent on the
average against deposits payable on
demand, including the small amount
Of deposits which will remain from the
loans. Il we were to calculate, then.
the possible amount Of loans which q
banker could make on the basis Of q
500 cash deposit, assuming that he
kept . 10 per cent reserve against de-
posts and that 20 per cent Of the de-
posts resulting from the loans were
unused. We should arrive at . figure
around $ll0. Thus given increase in
q banks deposits allows the banker
to expand his loans by an amount only
6lightly larger than this increase.
Let US see how this would work out
In practice. The bank receives the
500 deposit and makes loan Of $40.
Temporarily this amount appears as q
deposit, but 30 per cent Of it, or $sS.
viii on the average be withdrawn
during the period Of the loan, leaving
only 922 as the average balance. The
withdrawal Of $88 reduces the cash to
ZIP. This leaves as reserve the
1egally-required amount approx
mately 10 per cent on the average -
against the original 500 deposit plus
the $22 deposit remaining from the
loan.
Why Figures Vary
Il Is now possible to explain, with
out resorting to any magical theory of
bank credit expansion, why loans and
deposits are found to be SO much lar
ger than reserves. It Is seen that the
remaining reserve Of SIP in the above
illustration Is only fraction Of either
the deposits or the loans. But surely
there Is nothing remarkable about
this. The So is the cash left over at
ter the lending operation has taken
place the cash on the basis Of
which the banker was able to make
the loans. SO much for the immedi-
ate results Of the loans.
When, however, we consider the ul-
innate results in the banking system
Is = whole, the relationships among
these items are a bit more complex.
The 488 which In the above example
was withdrawn by the borrower will
Be paid to people who tend to re-
deposit It In various banks. Some Of
It win Be redeposited in the original
bank and thus enable this bank to
make some additional loans, but only,
It should Be noted, because its reserves
have been replenished. Most OF the
e88, however, will 60 to other banks.
Each bank which receives a portion Of
these funds experiences an increase In
Its deposits. This enables it to make
new loans, and these, again, lead to
Withdrawals and redeposits in other
banks This process Of redepositing
end relending Is repeated many times.
Eventually, Is result Of the 500 de-
post In our original bank, the group
Of banks Is Z whole may increase its
loans and deposits by as much as ST.
900 and still have 10 per cent re-
serve. All Of this Is accomplished
without any hank ever lending more
than slightly In excess Of its free re-
serves. Moreover, the deposits which
arise II each bank largely represent
funds actually paid into that bank
ana are not merely the creation Of
the banker.
Can't Manufacture Credit
There = no truth. then. in the wide
" held notion that . banker can man
ufacture credit to an amount many
times his cash. It is important that we
rid ourselves Of such an idea, for It at
tributes to the banker q certain power
and . certain prodigious opportunity
tor profits which: he does not, in fact,
enjoy. The banker Is not q magician.
luNvjew Of this, then, Is there any
Qualification ct I'll for the particular
interest which the public shows In the
bankdbs operations md the restric-