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

162 Money, Bank Credit, and Economic Cyclesevent, such as the death or survival of the policyholder). Thelife insurance contract is therefore equivalent to a savingstransaction (in which the ownership and availability of presentgoods are relinquished in exchange for the ownershipand availability of future goods), but it is a form of perfectedsavings, because it makes it possible to receive a considerablesum from the very moment the contract takes effect, given theanticipated, uncertain event takes place (for example, the policyholderdies). Any other traditional savings method (traditionalmutuum or loan operation) would require a prolongedperiod of many years of saving to accumulate the capital paidby an insurance company in case of death. In other words, lifeinsurance contracts, the calculation of probabilities based onmortality and survival tables, and the principle of mutualismor dividing loss among all policyholders sustaining an institutionmake it possible from the first moment to receive, should theanticipated event occur, a significant sum of money which, usingother methods, could only be accumulated after a period of manyyears.Moreover life insurance is a long-term contract whichincorporates complex financial and actuarial components andrequires the prudent investment of significant resources. Theavailability of these resources is transferred to the mutual orlife insurance company, which must collect and invest themathematically-calculated reserves necessary to make thefuture payments it will be obliged to make. These amounts arecalled “mathematical,” because they result from the calculationof probabilities of death and survival according to mortalitytables, which are extremely reliable and highly constantfor most western populations. It is possible to calculate, withas small a probability of ruin as is desired, the amount ofmoney necessary to pay all guaranteed benefits. Later we willexamine the radical differences which from an economicfinancialstandpoint exist between life insurance and the irregulardeposit contract with a fractional reserve. As opposed tolife insurance, the irregular deposit contract does not permitthe calculation of probabilities, since the institution (fractional-reservebanking) does not exist completely independentlyof the recurrent massive withdrawal of deposits.