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

142 Money, Bank Credit, and Economic Cyclesworthless or of limited value and therefore incapable of balancingthe corresponding deposit accounts on bank balancesheets. Consequently, bank insolvency tends to recur, banksbeing repeatedly unable to meet their obligations (without theexternal support of the central bank).In addition, if for the sake of argument we assume that thelaw of large numbers is applicable to banking, then in thepresence of a fractional reserve the deposit contract clearlybecomes an aleatory contract. 28 In such a contract, delivery ofservices by the bank is in any case an uncertain event whichdepends upon circumstances particular to each case. The contract’suncertainty stems precisely from the possibility thatdepositors of a percentage of deposits exceeding the reserveratio will attempt to withdraw their deposits and hence beunable to do so. The first to arrive would be able to retrievetheir money, but those arriving after a certain point would not.Surely not even the depositors of this second hypothesisintend to enter into an aleatory contract subject to the uncertaintywe have just described. Therefore, the most logical conclusionin this second case is either that the contract does notexist, since its purpose is impossible (without a 100-percentreserve ratio, it is impossible to insure that the banker willalways be able to meet his obligations), or that the supposedauthorization from the depositors lacks legal validity, becausethe essential objective is still the safekeeping of the good, andthis inevitably and obligatorily requires the custody of 100percent of the tantundem. 2928 On aleatory contracts see Albaladejo, Derecho civil II, Derecho de obligaciones,vol. 1: La obligación y el contrato en general, pp. 350–52. It is importantto emphasize that the fact that there is an aleatory nature to themonetary irregular-deposit contract with a fractional reserve in whichthe law of large numbers is fulfilled (in fact impossible) is only secondaryto the other points we raise against such a contract.29 The popular reaction of Argentinian citizens against the banking crisisof 2001 and the subsequent blockade of all their demand deposits(known as corralito) is a perfect empirical illustration of the true safekeepingpurpose of bank deposit contracts and of the impossibility offractional-reserve banking (without a lender of last resort).