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

Attempts to Legally Justify Fractional-Reserve Banking 147has established a monopoly on the issue of paper money anddeclared it legal tender, it has the function of ensuring the creationof all the liquid assets necessary to satisfy any immediateneed private banks may have for funds. In chapter 8 we willstudy the resulting emergence of a centralized monetary policy,which like all attempts to coordinate society through coercivemeasures (socialism and interventionism), and for thesame reasons, is ultimately doomed to failure. Indeed, centralbanks and governmental monetary policy are the main culpritsin the chronic inflation which in varying degrees affectswestern economies, as well as in the successive and recurrentstages of artificial boom and economic recession which causeso many social upheavals. But first, let us continue with ourlegal analysis.3AN INADEQUATE SOLUTION:THE REDEFINITION OF THE CONCEPT OF AVAILABILITYThe belief, held by the most qualified theorists, that it isimpossible to reconcile two contracts as incompatible as themonetary irregular deposit and the loan contract, along withthe fact that the majority of contracts sustaining present-daybanking are demand deposits (monetary irregular-deposit contracts)have led scholars to try to formulate alternative juridicalconstructions to harmonize the irregular deposit contractwith “traditional” banking, i.e., fractional-reserve banking.Some have tried to solve this contradiction by “redefining”availability. In fact, for subscribers to this line of thought, availabilityneed not be understood in a strict sense (100-percentreserve ratio or keeping the tantundem available to the depositorat all times), but could be interpreted in a “lax” one: forexample, the “general” solvency of the bank by which it meetsits obligations; “prudent” investing; avoidance of high-riskspeculation and the corresponding losses; maintenance ofappropriate liquidity and investment ratios; and in short, compliancewith an entire body of rigorous banking laws, whichtogether with the hypothetical operation of the “law of largenumbers” in the opening of deposit accounts and withdrawal