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

Attempts to Legally Justify Fractional-Reserve Banking 141idea invests it. Hence, this is a clear case of error in negotio,which is an error concerning the nature of the transaction andrenders it completely void. 26 To many this conclusion mayappear extreme or disproportionate, but it is difficult to arriveat any other if we base our analysis on the legal argumentsand principles inherent in the contracts we are studying. 27Second, let us now assume that a certain group of bank customers(or for the sake of argument, all of them) enter into adeposit contract aware and fully accepting that banks willinvest (or loan, etc.) a large portion of the money they deposit.Even so, this knowledge and hypothetical authorization doesnot in any way detract from the essential cause or purpose ofthe contract for these customers, whose intention is still toentrust their money to the banker for safekeeping; that is, tocarry out a monetary irregular-deposit contract. In this case,the contract the depositors believe they have finalized isimpossible from a technical and legal standpoint. If they allowthe banker to use the money, then it can no longer be availableto them, which is precisely the essential cause or purpose ofthe contract. Moreover, in chapter 5 we will see from the perspectiveof economic theory that in a fractional-reserve bankingsystem the massive signing of contracts and the “law oflarge numbers” cannot possibly ensure the fulfillment of alldepositor requests for full repayment of deposits. At this time,we will delay going into detail on our thesis, except to say thatit rests on the acknowledgment that the current banking systemgenerates loans without the backing of real savings. Theseloans in turn foster the foolish investment of resources andgive rise to unwisely-invested business assets which are either26 See Hernández-Tejero Jorge, Lecciones de derecho romano, pp. 107–08.Hernández-Tejero himself provides the following example, which isperfectly applicable to the case we are dealing with: “If one personentrusts to another a good on deposit, and the person receiving the goodbelieves the transaction to be a mutuum or loan, then neither a depositnor a mutuum exists.”27 Furthermore, it is obvious that permission or authorization to use thegood cannot be assumed but must be proven in each case. It seemsunlikely that in most demand deposit contracts entered into by individualssuch proof would be possible.