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

600 Money, Bank Credit, and Economic Cyclesallows the insurance company, meanwhile, to make the necessarycollections and maintain the necessary financial stability.111Successive cycles of boom and depression invariably posea formidable challenge to credit insurance companies, whichapart from their traditional services (collections, customer riskclassification, etc.), perform an additional one: during economicbooms they accumulate important financial reserves,which they later use in crises and recessions to systematicallysatisfy the much larger claims filed during these periods. Inany case we must recognize that the legal precautionary measuresadopted to this point have been insufficient to preventthe failure and liquidation of some of the most prominentcredit insurers in the western world during each of the recentcrises which have erupted in the West. We must also acknowledgethat the institution of credit insurance will always behighly vulnerable to stages of recession, particularly whilebanks continue to operate with a fractional reserve. 112111 Francisco Cabrillo, Quiebra y liquidación de empresas (Madrid: UniónEditorial, 1989).112 It is obviously impossible for credit insurance companies to technicallyinsure loans the banking system itself grants during its expansionaryphase, since, as we have already shown, the necessary independencebetween the existence of the insurance and the results of thehypothetically insured event is lacking. Indeed if bank loans wereinsured, there would be no limit to their expansion, and in the inevitablerecession which credit expansion always causes, a systematic increase inthe number of defaulters would render the policy technically unviable.Thus, for the same reasons the law of large numbers and a fractionalreserveratio are inadequate to insure demand deposits, it is technicallyimpossible to insure banks’ credit operations through the credit insuranceindustry.