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

Attempts to Legally Justify Fractional-Reserve Banking 153Hayek means that today’s banking structure may appearsustainable despite its juridical inconsistency, due to the supportit currently receives from the state and to an official central-bankinginstitution which generates the liquidity necessaryto bail out banks in trouble (in exchange for theircompliance with a tangled web of administrative legislationcomprising endless, cryptic and ad hoc directives and memoranda).Nevertheless, the violation of the traditional legalprinciples governing property rights inescapably results innegative social consequences. For instance, the return ofdeposits may be thus “guaranteed” at least theoretically(even using a fractional-reserve ratio, assuming the centralbank lends its support). However, what cannot be guaranteed isthat the purchasing power of the monetary units will not varygreatly with respect to the original deposit. In fact, ever sincethe creation of modern monetary systems, each year withslight differences in degree, we have been plagued by seriouschronic inflation which has significantly decreased the purchasingpower of the monetary units returned to depositors.We must also consider the effects of the intra- and inter-temporalsocial discoordination inflicted on modern economiesby the current financial system, based on a fractional reservefor private banks and the conducting of monetary policy bythe central bank. These effects consist of recurrent, successivephases of artificial boom and economic recession involvinghigh unemployment rates, which do great harm to the harmonious,stable development of our societies.As a result, in the banking and monetary fields we againobserve the validity of Hayek’s seminal idea that whenever atraditional rule of conduct is broken, either through directgovernmental coercion or the granting of special governmentalprivileges to certain people or organizations, or a combinationof both (as occurs in the monetary irregular deposit witha fractional reserve), sooner or later damaging, undesired consequencesfollow, to the great detriment of the spontaneoussocial processes of cooperation. The traditional rule of conductbroken in banking, as we have studied in detail in these firstthree chapters, is the general legal principle that in the monetaryirregular-deposit contract, custody and safekeeping (theessential element or purpose of all deposits) should always