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

The Credit Expansion Process 191regularly promises more than it could actually pay should theworse come to the worst”? 14 In any case, these are simply indicationswhich any practical person could understandably interpretin a wide variety of ways. Legal principles exist for preciselythis reason. They act as an “automatic pilot” for behaviorand facilitate cooperation between people, though given theabstract nature of these principles, we may not be able to identifytheir exact role in the processes of social interaction.As Mises correctly indicates, as long as confidence in thebank is preserved, the bank will be able to continue using themajority of deposited funds, and customers will remainunaware that the bank lacks the necessary liquidity to meet allof its commitments. It is as if the bank had found a permanentsource of financing in the creation of new money, a source itwill continue to tap as long as the public retains its faith in thebank’s ability to fulfill its commitments. In fact, as long asthese circumstances last, the bank will even be able to use itsnewly created liquidity for covering its own expenses or forany other purpose besides granting loans. In short, the abilityto create money ex nihilo generates wealth the banker can easilyappropriate, provided customers do not doubt his goodconduct. The generation of this wealth is detrimental to manythird parties, each of whom suffers a share of the damagecaused by the banker’s activities. It is impossible to identifythese individuals, and they are unlikely to recognize the harmthey suffer or to discover the identity of the perpetrator. 1514 Wilhelm Röpke, Economics of the Free Society, trans. Patrick M. Boarman(Grove City, Pa.: Libertarian Press, 1994), p. 97.15 We will examine the process of loan creation and the resulting transferof wealth to bankers in our analysis of the effects fractional-reservebanking has from the perspective of the entire banking system. Regardingthe fact that it is not necessary for fiduciary media to be lent (thoughin practice this is always or almost always the case), Ludwig von Misesstates:[i]t is known that some deposit banks sometimes opendeposit accounts without a money cover not only for the purposeof granting loans, but also for the purpose of directlyprocuring resources for production on their own behalf. Morethan one of the modern credit and commercial banks has