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

Attempts to Legally Justify Fractional-Reserve Banking 139way the irregular deposit contract with the loan contract.Upon reading Garrigues’s treatment of monetary bankdepositcontracts, one inevitably gets the impression that Garrigueshimself suffers from a rather “guilty conscience” forcarrying out such a forced legal analysis to try to justify theunjustifiable: the supposed existence of a monetary irregulardepositcontract which legally, and in accordance with legalprinciples and logic, permits the banker to freely use thegoods deposited; in other words, fractional-reserve banking.THE NOTION OF THE UNSPOKEN OR IMPLICIT AGREEMENTAlso inadmissible is the argument that Article 1768 of theSpanish Civil Code suggests that in irregular deposit contractsa type of “implicit or unspoken agreement” exists by whichdepositors authorize bankers to use money on deposit. Thiscourse of reasoning is unacceptable mainly because Article1768 speaks of permission “to use the good deposited,” andwe know that it is not the power to use the good that makesthe monetary-deposit contract an irregular deposit contract.This authorization is inherent in all deposits of fungiblegoods, the very nature of which prevents them from beinghandled individually. In a sense, a transfer of ownershipresults, which in turn implies authorization for the depositaryto use the goods. Nevertheless, we have already seen that thistransfer of ownership and of power to use the depositedgoods should be understood in a general sense. If it is not possibleto track the individual units deposited, then we may certainlyconsider there to be a transfer of ownership and ofpower to use the specific items deposited. However, as is logical,this is perfectly compatible with a continuous 100-percentreserve requirement; that is, the custody and safekeeping ofthe tantundem and its availability to the depositor. This constitutesthe banker’s essential obligation and is the foundation ofthe deposit contract’s essential purpose. To put it another way,the characteristic, essential nature of the irregular deposit contractis not determined by the transfer of authority to use thegoods, but by the fungible nature of the items deposited andby the contract’s purpose. A transfer of authority to usedeposited goods may occur independently of an irregulardeposit, and this is indeed what happens, for example, in the