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

178 Money, Bank Credit, and Economic Cycles3THE BANK’S ROLEIN THE MONETARYBANK-DEPOSIT CONTRACTThe economic events and accounting procedures involvedin the monetary bank-deposit contract are substantially differentfrom those examined in the preceding section, on the loanor mutuum. (We covered the loan contract first in order to betterillustrate by comparison the essential differences betweenthe two contracts.)In the case of a regular (or sealed) deposit of a certain numberof perfectly and individually marked monetary units, theperson receiving the deposit need not record anything underAssets or Liabilities, because no transfer of ownership occurs.However, as revealed by our study of the legal essence of theirregular (or open) deposit contract, this second contract representsa deposit of fungible goods, in which it is impossible todistinguish between the individual units deposited, andtherefore a certain transfer of “ownership” does take place.This occurs in the strict sense that the depositary is not obligedto return the very same units received (which would beimpossible, given the difficulty of specifically identifying theunits of a fungible good received), but others of equal quantityand quality (the tantundem). Nevertheless, even though a[t]he bank is expert on where its loans should be made and towhom, and reaps the reward of this service. Note that therehas still been no inflationary action by the loan bank. No matterhow large it grows, it is still only tapping savings from theexisting money stock and lending that money to others. If thebank makes unsound loans and goes bankrupt, then, as in anykind of insolvency, its shareholders and creditors will sufferlosses. This sort of bankruptcy is little different from anyother: unwise management or poor entrepreneurship willhave caused harm to owners and creditors. Factors, investmentbanks, finance companies, and money-lenders are justsome of the institutions that have engaged in loan banking.(Murray N. Rothbard, The Mystery of Banking [New York:Richardson and Snyder, 1983], pp. 84–85)