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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 97overseas that, should the ship sink or be captured by pirates,they would not be able to repay deposits even after selling allof their assets. And they are not guilty of mortal sin only whenthe deal turns out poorly, but also when it turns out well. This isdue to the chance they take of hurting depositors and the guarantorsthey themselves supply for the deposits. 101We find this warning of Luis de Molina admirable, but atthe same time we are astonished at his failure to recognize theprofound contradiction that ultimately exists between hiswarning and his explicit acceptance of “prudent” fractionalreservebanking. The fact is, regardless of how prudentbankers are, the only surefire way to avoid risks and ensurethat deposits are permanently available to depositors is tomaintain a 100-percent reserve ratio at all times. 102101 Ibid., pp. 138–39; italics added.102 After Molina, the leading scholar with a similar viewpoint on bankingissues is Juan de Lugo, also a Jesuit. This suggests that, with regardto banking, the School of Salamanca comprised two currents of thought:one which was sound, doctrinally well-supported, close to the futureCurrency School, and represented by Saravia de la Calle, Martín deAzpilcueta, and Tomás de Mercado; and another, one more prone to thefollies of inflationism and to fractional-reserve banking, and close to thefuture Banking School. Luis de Molina, Juan de Lugo, and to a muchlesser extent, Domingo de Soto exemplified this current. In chapter 8we will set out this thesis in greater detail. For now we would just liketo point out that Juan de Lugo followed in Molina’s footsteps and gavean especially clear warning to bankers:Qui bene advertit, eivsmodi bancarios depositarios peccaregraviter, & damno subsequuto, cum obligatione restituendipro damno, quoties ex pecuniis apud se depositis tantamsummam ad suas negotiationes exponunt, ut inhabilesmaneant ad solvendum deposentibus, quando suo temporeexigent. Et idem est, si negotiationes tales aggrediantur, exquibus periculum sit, ne postea ad paupertatem redacti pecuniasacceptas reddere non possint, v.g. si euenrus ex navigationepericulosa dependeat, in qua navis hostium, velnaufragij periculo exposita sit, qua iactura sequunta, ne expropio quidem patrimonio solvere possint, sed in creditorum,vel fideiussorum damnum cedere debet. (R.P. Joannis deLugo Hispalensis, S.I., Disputationum de iustitia et iure tomussecundus, Disp. 28, section 5 [Lyon: Sumptibus Petri Prost,1642], pp. 406–07)