Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 65act as mere financial intermediaries. The evolution of Churchdoctrine on interest in no way implies a sanction of fractionalreservebanking, i.e., bankers’ self-interested use (which usuallymeans granting loans) of demand deposits. 47To a great extent, the conceptual confusion we are dealingwith arose in the Middle Ages as a result of the canonical banon interest. One of the main artifices 48 devised by economicagents to conceal actual interest-paying loans was to disguisethem as demand deposits. Let us see how they did it. First, wemust think back to our discussion of the monetary irregulardepositcontract in chapter 1. One of the most notable guidelinesfound for this contract in the Corpus Juris Civilis stipulatedthat, if the depositary were unable to return the depositon demand, not only was he guilty of theft for misappropriation,but he was also obliged to pay interest to the depositorfor his delay in repayment (Digest, 16, 3, 25, 1). Hence, itshould come as no surprise that throughout the Middle Ages,47 This is precisely the opinion held by Father Bernard W. Dempsey S.J.,who concludes in his remarkable book Interest and Usury (Washington,D.C.: American Council of Public Affairs, 1943) that even if we acceptinterest as legitimate, fractional-reserve banking amounts to “institutionalusury” and is especially harmful to society, since it repeatedlygenerates artificial booms, bank crises and economic recessions (p.228).48 A clear, concise list of the tricks used to systematically disguise loansand interest can be found in Imbert’s book, Historia económica (de los orígenesa 1789), pp. 157–58. Imbert mentions the following methods ofconcealing interest-bearing loans: (a) bogus contracts (such as repurchaseagreements or real estate guarantees); (b) penalty clauses (disguisinginterest as economic sanctions); (c) lying about the amount ofthe loan (the borrower agreed to repay a sum higher than the actualloan); (d) foreign exchange transactions (which included the interest asan additional charge); and (e) income or annuities (life annuities includinga portion of both the interest and the repayment of the principal).Jean Imbert makes no express mention of the depositum confessatum, oneof the most popular ways of justifying interest. It fits well into the“penalty clauses” category. See also the reference Henri Pirenne makesto the “utmost ingenuity” used to conceal “dangerous interest.” Economicand Social History of Medieval Europe (London: Kegan Paul, Trench,Trubner and Company, 1947), p. 140.