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

Attempts to Legally Justify Fractional-Reserve Banking 149Quite significantly, Garrigues himself acknowledges thatall of this doctrine involves “the unavoidable replacement ofthe traditional concept of custody by an ad hoc concept, theplausibility of which is highly doubtful.” 36 Garrigues is rightin considering this reinterpretation by theorists of the conceptof availability “forced” (even though he eventually accepts it).The theory that in the irregular deposit contract the safekeepingobligation merely consists of using resources “prudently”so the bank retains the solvency necessary to pay its debts isactually untenable. The prudent use of resources is advisablein all human actions; for instance, in all loan (not deposit) contractswhich specify that certain resources are to be used andthen returned following a set term. That is, it is advisable ifthere is a desire to comply with this obligation (the very meaningof solvency). 37 However, as we know, the purpose of theirregular deposit contract is different from that of the loancontract and requires something markedly different: the custodyor safekeeping of the good at all times. So if the depositorstry to withdraw their deposits and the bank cannot paythem, regardless of whether it is solvent overall and can payonce it converts its investments into cash, the essential obligationin the deposit contract is clearly violated. This is due tothe fact that some contracting parties (depositors) who haveentered into the contract believing its fundamental purpose tobe the custody and safekeeping of the good and its continuousavailability are compelled to become something radically different:forced lenders. As such, they lose the immediate availabilityof their goods and are obliged to wait for a prolongedbook La responsabilità della banca nei contratti di custodia (Milan: EditorialGiuffrè, 1983).36 Garrigues, Contratos bancarios, p. 365.37 Furthermore, the standard criterion of “prudence” is not applicable inthis case: an imprudent bank may be successful in its speculations andpreserve its solvency. By the same token, a very “prudent” banker maybe seriously affected by the crises of confidence that inevitably followartificial booms, which are generated by the fractional-reserve bankingsystem itself. Hence, prudence is of little use when there is a violation ofthe only condition capable of guaranteeing the fulfillment of the bank’scommitments at all times (a 100-percent reserve ratio).