124 BANKING THEORIES IN UNITED STATES

which the deposits are based. But this is merely equivalent to
saying that banking can extend credit upon the basis of certain
cash reserves only so long as those reserves continue to exist.
Still again, — for the problem is a treacherous one, — if the
individual bank could function simply as a middleman, passing
on to borrowers funds that are left by cash depositors, it would
be impossible for us to read into the operations of the banking
system as a whole any more than this. For, obviously, if no single
bank creates the deposits it lends, the group of banks taken together
 cannot do so.
By way of final argument — and we return now to the point of
view of the banking system at large — let us ask what would
happen were the habits of a community to change overnight and
were checks to be used to a much less degree in making payments.
To simplify the analysis, let us say that the government reserved
for itself the privilege of issuing paper money. Assume that one
million dollars were suddenly and permanently withdrawn from
bank reserves, to circulate in making payments hitherto accom:
plished by the drawing and depositing of checks. The aggregate
of bank deposits would immediately shrink by the amount of one
million dollars through the action of depositors in exercising their
rights against the banks. But would the matter stop there?
Obviously not, for the banks would have to contract their loans
by several million dollars until the proper reserve ratio had been
restored by the resultant contraction of deposits. Surely one can
hardly regard the banking system as serving simply in an intermediary
 capacity if the withdrawal by depositors of a given
amount of cash, diminishing the aggregate of reserves in the system,
 causes a contraction of loans to several-fold the amount of
the deposits cancelled.