In his book "Money, Bank Credit and Economic Cycles’ in chapter 4 subchapter 5 he writes on page 223 (second english edition, .pdf version - http://mises.org/books/desoto.pdf) that: “ds1 represents Bank A’s secondary deposits and equals 1,219,512 m.u”, while (if I correctly understand the definition) I would argue that Bank A’s secondary deposits equal 1 097 560 money units and 121 952 of primary deposits (pp 218-219). Do I err or he errs?
- I have a second problem: on p. 239 author introduces the term ‘gross deposits’ without defining it, the same goes for ‘net deposits’, the term that he only gives formula for but again no definition.
I tried to derive those definitions inductively by simulating the credit expansion in bank’s book entries in spreadsheet (akin to the table on p.230). I compared the sums in rows with result of numerical example [40] on p. 241, but they do not match, as they should given the formulas. Anyone, please?
I don’t have an access to University Economics by Alchian&Allen, which Huerta de Soto cites.
page 196:
. Of this amount,
1,000,000 m.u. correspond to physical monetary units; that is,
to primary deposits. The other 900,000 m.u. reflect fiduciary
media created from nothing; in other words, derivative or sec-
ondary deposits.
page 219:
Bank A
Balance Sheet
c=0.1 and k=0.2
Assets
Cash 121,952
Loans 1,097,560
Total Assets 1,219,512
Clearly, you are right.
Gross Deposits is what he used to call Deposits, meaning the sum of the amounts appearing as “Deposits” in the Credits Column [and the Liabilities Column] of the bank’s Balance sheets.
Net Deposits is defined by the formula. There is no better definition than a formula.
I tried to derive those definitions inductively…
I’m not sure if there is a language problem here. You cannot derive a definition by simulating the credit expansion of something. The definition is something the author makes up in his head, and it is a short way of saying a lot of words.
…(akin to the table on p.230). I compared the sums in rows with result of numerical example [40] on p. 241…
Numerical example [40] is talking about a single bank. The table on 230 is talking about a series of banks. Of course the results won’t be the same with one bank and a series of banks.
Thanks for the reply regarding my first problem!
As for the second…
I came to the solution myself after a lot of experimentation.
But first, I would stick to the table on p. 230 for the purpose of clarity, because regardless of the banking system we are talking about (one monopolistic bank or a system of small banks) the operations are the same, even Huerta de Soto writes:
“This formula [[27] - for total deposits in the system of small banks with c=0,1,k=f=0] is identical to the deposit multiplier in the case of a single, monopolistic bank [14].”
So the reason why my calculations deviated from Soto’s results is the confusion I had with his [40] example, since I mistakenly took numbers from his first numerical example in this subchapter on p. 239:
“f = 0.15, then when Bank A loans 900,000 m.u., the amount of money which would return to the banking system would be equal to (1 – f) 900,000 = (1 – 0.15) 900,000 = 0.85 x 900,000 = 765,000 m.u.”
However in the [40] example there is no loan of 900 000 if my simulation is to be consistent with his calculations, because the first deposit in the bank is not of 1 000 000 m.u. but 150 000 less: of 850 000 m.u. The reserve, then, is 85 000 and the first loan is 765 000, the filtered out m.u. equals 765 000 x 0,15 = 114 750 and so on. Only with this procedure his [40] numerical results are consistent with my simulation results.
So if the first (primary) deposit in the bank is of d in quantity, then the formula [36] has to look like Dn=(d/(1-f))/(c+(f/(1-f)))
and formula [30]: F=fDg-df
If it’s still messy here are the calculations: http://www.mediafire.com/?u073bd9p3s0pbyn
1 page contains my mistaken numbers
2 page contains correct numbers
3 page contains my mistaken numbers with the correction to the formula
…because the first deposit in the bank is not of 1 000 000 m.u. but 150 000 less: of 850 000 m.u.
I totally agree. He’s assuming 150K is going to be taken out of the bank, so those 150K cannot be a “reserve” for fractional reserve banking, leaving only 850K.
Glad it straightened out.
I have a question if you don’t mind
Are there any situations where fiduciary media does not equal a secondary deposit or a derivative deposit? Do these terms all mean the exact same thing in all cases or are they applied differently?
Many thanks