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

Attempts to Legally Justify Fractional-Reserve Banking 145the value and efficacy of surrendering a good depend on theprocedure or document accompanying the action, then it isclearly important that the procedure or contract be welldefinedand appropriately named, that its conditions bewell-regulated and that both parties be aware of the legalconsequences of these conditions. To fail to clarify or fullyspecify these details indicates a remarkable ambiguity on thepart of bankers, and in the event that adverse legal consequencesresult, their weight should fall on the bankers’ shouldersand not on those of the contracting party, who with goodfaith enters into the contract believing its essential purpose orcause to be the simple custody or safekeeping of the moneydeposited.Third and last, we may suppose that, if this is the depositors’real desire, they could change their original plan to makean irregular deposit of money and instead enter into amutuum or loan contract in which they agree to the loss ofavailability of the good and to its transfer to the banker for a setterm in exchange for interest. This would constitute a true novationof the contract, which would change from an irregulardeposit to a loan. The novation would be subject to generallegal regulations regarding this type of contractual modification.This is a fully legitimate legal possibility which is littleused in practice. Moreover, paradoxically, when novationstake place in banking their purpose is usually the opposite. Inother words, what undoubtedly begins as a mutuum or loancontract, although it is called a “time” deposit because itinvolves the real transfer of availability of the good to thebanker for a set term or time period, on many occasionsbecomes an irregular deposit contract via the correspondingnovation. This is what happens when bankers, in order tomaintain their resources or attract more, either publicly or privately,and either verbally or in writing, offer the holder of a“time” deposit account the possibility of withdrawing hismoney at any time with very little or no financial penalty. Tothe extent that account holders make these “time” deposits(which are clearly loans) with the subjective and primary goalof depositing the money for safekeeping, then a monetaryirregular deposit clearly takes place, regardless of its externalappearance. Furthermore, insofar as the contract’s fundamental