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

Attempts to Legally Justify Fractional-Reserve Banking 143A natural incompatibility exists between the legitimateirregular deposit contract, the purpose of which is the custodyor safekeeping of the deposited goods, and the authorizationfor depositaries to use for their own profit the money theyreceive. These depositaries (bankers) take in funds they agreeto return as soon as requested by checking-account holders,but once the bankers have received the money, they makeinvestments, grant loans and enter into business deals that tieit up and under various circumstances actually prevent itsimmediate return. The supposed authorization, either expressor tacit, for bankers to use money on deposit is of little importanceif the essential purpose of the contract, the deposit ofmoney for safekeeping, continues intact. In this case the supposedauthorization would be irrelevant, due to its incompatibilitywith the contract’s purpose, and it would thus be as legallynull and void as any contract in which one of the parties authorizesthe other to deceive him or accepts in writing self-deception to hisown detriment. As the great Spanish expert in civil law, FelipeClemente de Diego, so appropriately states, an irregulardeposit contract in which the depositary is allowed to maintaina fractional-reserve ratio and hence can make self-interesteduse of a portion of deposited funds is a legal aberration,since at a fundamental level it conflicts with universal legalprinciples. For Felipe Clemente de Diego, there is no doubtthat this contracthas the disadvantage of leading us to the discovery of amonster which, by its very nature, lacks legal viability, likehumans with devastating malformations (monstrua prodigia),whom Roman law did not grant legal status. Article 30of the Spanish Civil Code expresses a more moderate versionof the same concept: “For civil purposes, only fetuseswith a human figure will be reported as born. . . . “ For everybeing has its own nature, and when this is not found in thebeing itself, but is drawn from others more or less similar toit, the being’s true nature appears to flee and vanish andceases to envelop it, reducing it to a monstrous hybrid borderingon a non-being. 3030 “Dictamen del señor de Diego (Felipe Clemente)” in La cuenta corrientede efectos o valores de un sector de la banca catalana y el mercado libre de