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

The Credit Expansion Process 183them to maintain the tantundem of monetary irregulardeposits continuously available to depositors, and they endedup using at least a portion of demand deposits for their ownbenefit. In chapter 3 we covered the comments of Saravia de laCalle with respect to this human temptation. Now we muststress how overwhelming and nearly irresistible it is, giventhe huge profits that result from yielding to it. When bankers firstbegan using their depositors’ money, they did so shamefacedlyand in secret, as shown by chapter 2’s analysis of differenthistorical cases. At this time bankers were still keenlyaware of the wrongful nature of their actions. It was only later,after many centuries and vicissitudes, that bankers were successfulin their aim to openly and legally violate the traditionallegal principle, since they happily obtained the governmentalprivilege necessary to use their depositors’ money(generally by granting loans, which initially were often givento the government itself.) 7 We will now consider the way7 Stephen Horwitz states that bankers’ misappropriation of depositors’money began as “an act of true entrepreneurship as the imaginativepowers of individual bankers recognized the gains to be made throughfinancial intermediation.” For reasons given in the main text, we findthis assertion dangerously erroneous. Furthermore, as we will see, in theappropriation of demand deposits no financial intermediation takesplace: only an awkward creation of new deposits from nothing. As forthe supposedly “commendable” act of “entrepreneurial creativity,” wedo not see how it could possibly be distinguished from the “creativeentrepreneurship” of any other criminal act, in which the criminal’spowers of imagination lead him to the “entrepreneurial discovery” thathe benefits from swindling others or forcibly taking their property. SeeStephen Horwitz, Monetary Evolution, Free Banking, and Economic Order(Oxford and San Francisco: Westview Press, 1992), p. 117. See also GeraldP. O’Driscoll, “An Evolutionary Approach to Banking and Money,”chap. 6 of Hayek, Co-ordination and Evolution: His Legacy in Philosophy,Politics, Economics and the History of Ideas, Jack Birner and Rudy van Zijp,eds. (London: Routledge, 1994), pp. 126–37. Perhaps Murray N. Rothbardhas been the strongest, most articulate critic of Horwitz’s idea.Rothbard states:[a]ll men are subject to the temptation to commit theft orfraud. . . . Short of this thievery, the warehouseman is subjectto a more subtle form of the same temptation: to steal or “borrow”the valuables “temporarily” and to profit by speculation