Chapter 4: The Credit Expansion Process

This chapter and the following five comprise an analysis of the economic consequences of violating the general legal principles inherent in the irregular deposit contract. We examined the legal and historical consequences of such violations in chapters 1, 2, and 3 and will now focus on the process by which banks create loans and deposits from nothing and on the different implications this process has for society. The most serious consequence of banks' creation of loans is the following: to the extent loans are granted without the corresponding backing of voluntary saving, the real productive structure is inevitably distorted and recurrent economic crises and recessions result. We will explain the circulation credit theory of the business cycle and then critically analyze the macroeconomic theories of monetarism and Keynesian economics. In addition we will carry out a brief review of the recurring economic crises which have thus far assailed the world. The first of the two final chapters contains a theoretical study of central banking and free banking, and the second consists of an examination of the proposal of a 100-percent reserve requirement for banking.