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

152 Money, Bank Credit, and Economic Cyclesa fractional reserve is used the bank will always be able tohonor all repayment requests, but it also infallibly starts aprocess which, at least every certain number of years, resultsin the inevitable loss of confidence in banks and the massiveunforeseen withdrawal of deposits. Conclusive proof of all of theabove is offered by the fact that fractional-reserve banking (i.e., bankingwithout a strict safekeeping obligation) has not been able to survivewithout a government-created central bank, which by imposinglegal-tender regulations and compelling the acceptance of papermoney, could produce out of nowhere the liquidity necessary inemergencies. Only an institution in conformity with generallegal principles can survive in the marketplace without theneed of privileges and government support, but solely byvirtue of citizens’ voluntary use of its services within theframework of general and abstract civil-law rules.Availability has also been defined as private banks’ compliancewith the whole structure of government banking legislationin exchange for the backing of the central bank aslender of last resort. However, this requirement is also artificialand shifts the issue of the impossibility of legally definingthe fractional-reserve bank deposit contract from the field ofprivate law (where the two cannot be reconciled) to the fieldof public law; that is, administrative law and pure voluntarismby which the authorities can legalize any institution, no matterhow legally monstrous it may seem. It is an odd paradox thatthe entire financial system is made to depend on the supervisionof the state (which historically has been the first to benefitfrom profits obtained through the non-fulfillment of thesafekeeping obligation in the monetary-deposit contract), and,as F.A. Hayek wisely indicates,The history of government management of money has . . .been one of incessant fraud and deception. In this respect,governments have proved far more immoral than any privateagency supplying distinct kinds of money in competitionpossibly could have been. 3939 Hayek, The Fatal Conceit, pp. 103–04.