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

118 Money, Bank Credit, and Economic Cyclesset fall into the same errors and legal contradictions we willsee in those of the first. In addition, in the next chapter we willexplain why the doctrinal essence of the new interpretation ofavailability (based on the “law of large numbers”) is inadmissiblefrom the standpoint of economic theory.We therefore conclude that past attempts to legally justifyfractional-reserve banking with respect to demand depositshave failed. This explains the ambiguity constantly present indoctrines on this type of bank practice, the desperate efforts toavoid clarity and openness in its treatment, the generalizedlack of accountability and ultimately (since fractional-reservebanking cannot possibly survive economically on its own), thefact that it has been provided with the support of a centralbank which institutes the regulations and supplies the liquiditynecessary at all times to prevent the whole set-up from collapsing.In chapter 8 we will discuss central banking andshow, through a theoretical analysis, that the nationalizationof money and the central bank’s regulation of the banking systemand its laws governing it have been incapable of maintaininga stable financial system that avoids economic cyclesand averts bank crises. Thus, we may conclude that the fractional-reservebanking system has failed as well, even thoughit is backed and protected by a central bank.At the end of this chapter we will examine several newtypes of financial contracts, some of which closely resemblethose bankers employ in connection with bank deposits. Inparticular, we will consider the different financial operationsinvolving a “repurchase agreement.” We will show that theseentail an evasion of the law; whenever payment of a previously-establishedprice is guaranteed regardless of the secondary-marketprice at the time the agreement is implemented,such operations conceal a true deposit contract.Finally, we will take a look at the profound, essential differencesbetween the financial operations related to banking andthose connected with life insurance. The latter represents aperfected form of true saving, where present goods areexchanged for future goods. It is an exchange with especiallyappealing features, but they in no way involve appropriationof demand deposits, credit creation, nor issuance of receipts