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

Bank Credit Expansion and Its Effects on the Economic System 3854BANKING, FRACTIONAL-RESERVE RATIOS,AND THE LAW OF LARGE NUMBERSOur analysis up to this point permits us to comment onwhether it is possible, as certain scholars maintain, to insurethrough the application of the law of large numbers the practiceof fractional-reserve banking. Essentially we will respondto the argument that banks, in order to fulfill their customers’normal requests for liquidity, and in accordance with the lawof large numbers, only need to keep on hand, in the form of acash reserve, a fraction of the money deposited with them incash. This argument lies at the heart of legal doctrines aimedat justifying the monetary irregular bank-deposit contractwith a fractional reserve. We critically examined this contractin chapter 3.The reference in this area to the law of large numbers isequivalent to an attempt to apply the principles of insurancetechniques to guard against the risk of deposit withdrawals,a risk assumed in advance to be quantifiable and thus technicallyinsurable. However, this belief is mistaken, and as wewill see, it is based on a misconceived idea of the nature of thephenomena before us. Indeed, far from the type of eventswhich correspond to the natural world and represent aninsurable risk, banking related phenomena fall within therealm of human action and are therefore immersed in uncertainty(not risk), which by its very nature is not technicallyinsurable.For in the field of human action the future is always uncertain,in the sense that it has yet to be built and the only part ofit possessed by the actors which will be its protagonists are certainideas, mental images, and expectations they hope to realizethrough their personal action and interaction with otheractors. Moreover the future is open to man’s every creativepossibility; hence each actor faces it with a permanent, ineradicableuncertainty which can be reduced through the patternedbehaviors of the actor and others (institutions) and the alertexercise of entrepreneurship. Nevertheless the actor will not be