26

A TREATISE ON MONEY

BK. I

rate at which a bank passively creates deposits partlydepends on the rate at which it is actively creatingthem. For although the borrowing customers willprobably pay away promptly the proceeds of theirloans, some of those to whom they pay them maybe depositor-customers of the same bank. To theextent that this occurs, so far from the actively-createddeposits being the offspring of the passively-createddeposits, it is the other way round. This illustratesin little what is happening to the banking systemas a whole. For to the extent that the borrowingcustomers pay away their deposits to customers ofother banks, these other banks find themselvesstrengthened by the growth of their passively-createddeposits to the same extent that the first bank hasbeen weakened ; and in the same way our own bankfinds itself strengthened whenever the other banksare actively creating deposits. So that a part of itspassively-created deposits, even when they are notthe offspring of its own actively-created deposits, isnevertheless the offspring of the actively-createddeposits of the other banks.

If we suppose a closed banking system, which hasno relations with the outside world, in a country whereall payments are made by cheque and no cash is used,and if we assume further that the banks do not findit necessary in such circumstances to hold any cashreserves but settle inter-bank indebtedness by thetransfer of other assets, it is evident that there is nolimit to the amount of bank-money which the bankscan safely create provided that they move forward instep. The words italicised are the clue to the behaviourof the system. Every movement forward by an indi-vidual bank weakens it, but every such movement byone of its neighbour banks strengthens it; so that ifall move forward together, no one is weakened onbalance. Thus the behaviour of each bank, though itcannot afford to move more than a step in advance of