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

96 Money, Bank Credit, and Economic Cyclesterms of legal nature and essence, with the loan or mutuumcontract. Therefore, his doctrinal attempt to identify the twocontracts with each other is a clear step backward, not only inrelation to the much more coherent views of Saravia de laCalle and Martin de Azpilcueta, but also with respect to thetrue legal nature of the contract as it had already been developedby Roman juridical science. Therefore, it is strange thata mind as bright and penetrating as Luis de Molina did notrealize the extreme danger of accepting the violation of thegeneral legal principles governing the irregular deposit, andthat he claimed,it never occurs that all the depositors need their money insuch a way that they do not leave many thousands of ducatsdeposited, with which the bankers can do business andeither earn a profit or suffer a loss. 100Molina does not recognize that in this way not only is theobjective or essential purpose of the contract (custody andsafekeeping) violated, but also that an incentive is providedfor all sorts of illicit dealings and abuses which inexorablygenerate an economic recession and bank failures. When thetraditional legal principle requiring the continual safekeepingof the tantundem in favor of the depositor is not respected, thereis no clear guide to avoiding bank failures. Furthermore, it isobvious that such vague, superficial suggestions as “try to actprudently” and “do not become involved in risky businessdeals” are not sufficient help in preventing the very harmfuleconomic and social effects of fractional-reserve banking. Atany rate, Luis de Molina does at least bother to state,It is important to warn that [bankers] commit mortal sin ifthey use in their own business dealings so much of themoney they hold on deposit that they are later unable, at theright time, to hand over the quantities the depositors requestor order to be paid against their deposited funds. . . . Inaddition, they commit mortal sin if they become involved inbusiness dealings entailing a risk of not being able to returndeposits. For example, if they send so much merchandise100 Molina, Tratado sobre los cambios, p. 137.