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

184 Money, Bank Credit, and Economic Cyclesbankers record the appropriation of demand deposits in theiraccount books. Our study will begin with the case of an individualbank and will later extend to the banking system as awhole.THE CONTINENTAL ACCOUNTING SYSTEMTwo accounting systems, the continental and the Anglo-Saxon, have traditionally been used to document the phenomenonwe are studying. The continental system is based onthe false notion that for the depositor, the irregular depositcontract is a true deposit contract, while for the banker it is aloan or mutuum contract. In this case, Mr. X makes a“demand” deposit of 1,000,000 m.u. in Bank A, and Bank Areceives the money not as a deposit, but as a loan it can freelyuse, considering the depositor will not be aware of this use norbe affected by it. Moreover, while keeping only a portion ofdeposits on hand as a security reserve, the bank estimates it willbe able to comply with depositors’ withdrawal requests.These expectations are especially strong, given that under normalcircumstances it is highly unlikely customers will attemptto withdraw an amount exceeding the security margin orreserve ratio. Experience appears to show this is true, and thetrust the bank has earned through years of properly safeguardingclients’ deposits contributes to the unlikelihood ofsuch a predicament, as does the fact that many withdrawalsare offset by new deposits. If we suppose the banker considersa 10-percent security reserve (also called a “reserve ratio”) sufficientto satisfy possible demands for deposit withdrawals,then the other 90 percent of demand deposits, or 900,000 m.u.,would be available to him to use to his own benefit. Using theor whatever, returning the valuables before they areredeemed so that no one will be the wiser. This form of theftis known as embezzlement, which the dictionary defines as“appropriating fraudulently to one’s own use, as money orproperty entrusted to one’s care.” (Rothbard, The Mystery ofBanking, p. 90)For more on why the above activity should be legally classified as acriminal act of misappropriation, see chapter 1, and chapter 3, pp.116–17.