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

Attempts to Legally Justify Fractional-Reserve Banking 161new ways to break the law and defraud others does not in theleast detract from the fundamental importance of a set of clearprinciples to guide citizens and direct authorities in their dutyto define and defend property rights.THE CASE OF LIFE INSURANCE CONTRACTSLife insurance is a typical time-honored legal institution,one that has been very well-formulated with respect to itsessence and legal content and well-supported by actuarial,economic and financial practices. Nevertheless, lately somehave tried to use it to conduct transactions which are verysimilar to the monetary irregular deposit with a fractionalreserve. These attempts have been very detrimental to thedevelopment and traditional solvency of life insurance as aninstitution and have involved deceiving supposed “policyholders-depositors.”Indeed, above all it is important to understand that thecontract of life insurance bears no relation to the monetaryirregular-deposit contract. Life insurance is an aleatory contractby which one of the parties, the contracting party or policyholder,commits to the payment of the premium or price of theoperation, and in return the other party, the insurance company,agrees to pay certain benefits in the event that the policyholderdies or survives at the end of a term specified in thecontract. Therefore, the premiums paid by the policyholder completelycease to be available to him, and availability is fully transferredto the insurer. 45 Hence, all life insurance contractsinvolve an exchange of present, certain goods for future, uncertaingoods (since their payment depends on an uncertain45 As life insurance entails disciplined saving over a period of manyyears, it is much more difficult to sell than other financial products soldwith the guarantee that the customer’s money will remain continuouslyavailable to him (deposits). For this reason life insurance is sold througha costly network of salespeople, while the public goes willingly andwithout prompting to make bank deposits. Life insurance companiesfoster and encourage voluntary, long-term saving, whereas banks produceloans and deposits from nothing and require no one to make theprior sacrifice of saving.