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

150 Money, Bank Credit, and Economic Cyclesperiod of time until the bank has, in a more or less orderlyfashion, converted its assets into cash and can pay.Though the concepts of solvency and the prudent use ofresources are not sufficient to comply with the essential meaningof availability in the irregular deposit contract, one mightat least think the problem could be resolved by the calculationof probabilities and the “law of large numbers,” to which Garriguesrefers. Nevertheless, as we argued above, even if itwere statistically possible to calculate probabilities in this field(which is certainly not the case, as will be shown in the followingchapters), the contract would at any rate cease to be adeposit and become an aleatory contract in which the possibilityof obtaining the immediate repayment of the depositedgood would depend on the greater or lesser probability that acertain number of depositors would not simultaneously go tothe same bank to withdraw their deposits.In any case, in chapter 5 we will argue that we cannotapply the objective calculation of probabilities to human acts ingeneral, and in particular to those related to the irregulardeposit. This is because the very institution of irregulardeposit with no safekeeping obligation (i.e., with a fractionalreserve), a legally paradoxical contract, triggers economicprocesses leading banks to make, on a large scale, unwiseloans and investments with the deposits they appropriate orcreate. This is the case because these loans and investmentsare ultimately financed by credit expansion which has notbeen preceded by an increase in real savings. Economic crisesinevitably result, along with a decrease in banks’ solvency anddepositors’ confidence in them, which in turn sets off a massivewithdrawal of deposits. Every actuary knows that if theconsequences of an event are not completely independent ofthe existence of the insurance policy itself, these consequencesare not technically insurable, due to moral hazard. In the followingchapters we will show that the fractional-reservebanking system (i.e., a system based on the monetary irregulardeposit in which 100 percent of the tantundem is not kept inreserve and available to depositors) endogenously, inevitablyand repeatedly generates economic recessions, making it regularlynecessary to liquidate investment projects, return loansand withdraw deposits on a massive scale. Therefore, the