In an earlier paragraph it is stated that the creation of deposits by White was limited by the declining ratio of White's cash to his deposits. So far the hypothesis has been that White was the only bank in existence, or was an isolated bank, and that when customers drew checks against White and gave them to their creditors, cash to the amount of those checks was withdrawn by the latter and stayed out in circulation. If, however, these creditors are also customers of the bank, they will probably deposit the checks for credit to their own account, in which case the process of payment amounts to a transfer of deposits on the books of the bank, and, inasmuch as no cash is demanded in such cases, a smaller reserve need be held by White as the proportion of his customers to the whole population becomes larger. If all the people are White's customers and all the payments in the community are made by checks on the bank, it will need to keep no reserve whatever, and the creation of deposits through loans will be unlimited so long as the deposits remain acceptable circulating media. Profits, too, will be limited only by the demands of borrowers for loans.

But the supposition of a sole or isolated bank is far removed from business facts. In the United States there are thousands of banks; many communities have more than one between which customers divide their patronage. A customer of bank A may hand a check to a customer of bank B, who will deposit it with B, and B will collect the cash from A. The loss of cash by A in meeting such collections over the counter, through the mails, and at the clearing house, would seriously affect the ratio of cash to deposits and endanger the ability of the bank to meet its demand liabilities. Now if one bank, by the method of loans and discounts, creates an unduly large sum of deposits, it is sure to suffer adverse clearing house balances, for, although many of the checks drawn against these accounts will be redeposited in the drawee bank by holders into whose hands they fall, many others will be deposited in other banks which will collect cash from that bank. Of course, if all other banks of the system are creating deposits at the same pace, it is possible that the checks drawn against A and deposited in banks B, C, D, and E, will just equal those drawn against B, C, or D, respectively, and deposited in A. But if any one bank creates deposits out of proportion to the others, it faces the impossibility of maintaining its cash. For the banking system as a whole the deposits may reach a high multiple of the cash reserve, but the multiple for any one bank of the system must approximate that prevailing in other banks.

If a customer of A applies to A for a loan, one of the factors determining whether it will be granted is the average daily balance of his account with A. Furthermore it is quite common for banks to insist that their borrowing customers maintain balances at or above some minimum percentage of their borrowings.

Probably 20 per cent is the commonest requirement; that is, if a loan of $100,000 is extended, the average daily balance of the borrower for the period of the loan must not be less than $20,000. From the date of the loan, the credit is checked against until it reaches some minimum amount; then a few days before maturity the borrower will probably build up his balance so that he may pay the loan. His checks drawn during the loan reach other near and distant banks, which present them to A for payment. The attendant loss of cash by A forces it to reduce or limit loans, but this acquisition of cash by bank B makes it possible for B to extend loans. Part of this cash will stay with B, but the larger part will be drawn out by bank C when C collects checks against B; in turn, C will extend loans and B will retract. By a continuation of this process the cash will be widely dispersed and become the basis for successive expansions of loans and deposits, but in smaller and smaller amounts. The sum of these deposits created by the loans process and based upon an increment of cash reserve deposited in some bank of the system may increase until the ratio of the cash to the new deposits approximates the ratio for the system as a whole. The total expansion of the system's deposits derived by the loans method is therefore determined by the cash reserve and the prevailing ratio of reserve to deposits. The deposits, however, arising out of loans by one bank in a system of otherwise homogeneous banks cannot exceed the increment of cash reserve probably by more than 25 per cent, because when such deposits are created the borrower proceeds to check out all but a minimum balance during the life of the loan and the checks may be largely presented through the clearing house or otherwise for payment. Nor can such deposits be much out of proportion to deposits derived by other banks from loans.