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

Attempts to Legally Justify Fractional-Reserve Banking 163An added complexity emerges because some types of lifeinsurance include the right of surrender. This means policyholderscan cancel their contract and obtain in cash the mathematicalliquidation value of their policy. Some theorists havedefended the position that insurance policies which includethis “surrender value” are very similar to monetary irregulardepositcontracts with fractional reserves. 46 Against this view,it is important to point out that whether or not a covert irregulardeposit exists depends ultimately on the true motive,purpose or subjective cause with which the contract is carriedout. If, as is usual with traditional life insurance policies, theclient intends to keep the policy until the end of its term andis not aware that he can redeem the funds at any time, then thetransaction is clearly not an irregular deposit but a traditionallife insurance contract. This type of insurance is sold with theidea that surrender is a “last resort,” a solution to be appliedonly in situations of pressing need when a family is completelyunable to continue making payments on a policywhich is so necessary for the peace of mind of all of its members.47However, we must acknowledge that (for the most part)recently banks and other financial institutions have exertedconstant pressure to erase the fundamental, traditional distinctionsand blur the boundaries between life insurance andbank-deposit contracts. 4846 Murray N. Rothbard, “Austrian Definitions of the Supply of Money,”in New Directions in Austrian Economics, Louis M. Spadaro, ed. (KansasCity: Sheed Andrews and McMeel, 1978), pp. 143–56, esp. pp. 150–51.Rothbard’s position is fully justified, however, with respect to all thenew “life insurance” operations conceived to simulate deposit contracts.47 Furthermore the surrender of the insurance policy traditionally entailsa significant financial penalty for the policyholder. This penalty resultsfrom the company’s need to amortize the high acquisition costs it incursduring the first year of the contract. The tendency to reduce these penaltiesis a clear indication that the operation has ceased to be a traditionallife insurance policy and has become a simulated bank deposit.48 As we will see at the end of chapter 7, from 1921 to 1938, while chairmanof the National Mutual Life Assurance Society, a leading British life