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

190 Money, Bank Credit, and Economic CyclesClearly, the banker will tend to deceive himself, thinkinghe has received his depositors’ money as a loan. Furthermore,it will never occur to him that by granting the loan to BusinessZ he has created 900,000 m.u. ex nihilo, nor much less that hehas granted a loan without the prior backing of an actualincrease in saving by anyone. Moreover, the banker will considerthe natural counteraction between withdrawals and newdeposits, and in accordance with his “experience,” he willdeem his decision to maintain a cash or security reserve of 10percent adequate and the resulting cash reserve of 100,000m.u. more than sufficient to satisfy requests for normal depositwithdrawals by customers. 12 The whole structure is madepossible by customers’ faith that the bank will honor its futurecommitments. The bank must build up this faith through theimpeccable custody and safekeeping of the money for anextended period of time, without any misappropriation. 13 It isunderstandable that a banker may not be familiar with economictheory and therefore not recognize the fundamentaleconomic events we have just described. It is more difficult toexcuse the fact that his misappropriation of deposits constitutesa violation of traditional legal principles which, in theabsence of a theory to explain the social processes involved,serve as the only safe guide to follow in order to avoid severesocial damage. However, any intelligent person, banker or not,would surely be able to see some signs of what is really happening.Why is it necessary for the banker to maintain anyreserve ratio? Does he not realize that when he acts legitimatelyas true intermediary between lenders and borrowers he neednot maintain any? Does he not understand, as Röpke states,that his bank is “an institution which, finding it possible to holdless cash than it promises to pay and living on the difference,12 Nevertheless we will demonstrate that the fractional-reserve bankingsystem itself regularly generates abnormal (massive) withdrawals ofdeposits and cannot with a fractional-reserve ratio fulfill at all timesdepositors’ demands for these withdrawals.13 We are, of course, referring to the different historical stages in whichfractional-reserve banking emerged (prior to the existence of centralbanks); we covered these in chapter 2.