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

154 Money, Bank Credit, and Economic Cyclestake the form of a continuous 100-percent reserve requirement.Consequently, any use of this money, particularly tomake loans, entails a violation of this principle and an act ofmisappropriation. Throughout history, bankers have beenquick to violate this traditional rule of conduct, making selfinteresteduse of their depositors’ money, as demonstrated byvarious examples in chapter 2. At first the bankers did thisguiltily and in secret, since they were still aware of the wrongfulnature of their actions. Only later, when they obtained thegovernment privilege of making personal use of their depositors’money (generally in the form of loans, which at first wereoften granted to the government itself), did they gain permissionto openly and legally violate the principle. The legalorchestration of the privilege is clumsy and usually takes theform of a simple administrative provision authorizing onlybankers to maintain a reduced reserve ratio.This marks the beginning of a now traditional relationshipof complicity and symbiosis between governments and banks.This relationship explains the intimate “comprehension” andclose “cooperation” which is still present today between thetwo types of institutions and has almost always existed, withslight variations, in all western countries. Bankers and authoritiessoon realized that by sacrificing traditional legal principlesin the deposit they could take part in an extremely lucrativefinancial activity, though a lender of last resort, or centralbank, was required to provide the necessary liquidity in timesof difficulty, and experience showed that sooner or later thesetimes always returned. However, the damaging social consequencesof this privilege granted only to bankers were not fullyunderstood until the theory of money and capital theorymade sufficient progress in economics and were able toexplain the recurrent emergence of economic cycles. The AustrianSchool in particular has taught us that the contradictory(from a legal-contractual as well as a technical-economicstandpoint) objective of offering a contract comprising essentiallyincompatible elements and aimed at combining theadvantages of loans (especially the possibility of earning intereston “deposits”) with those of the traditional monetaryirregular deposit (which by definition must allow the depositorto withdraw his funds at any time) is sooner or later bound