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

Central and Free Banking Theory 605a catalog of the requirements for a fair and lawful monetarybank deposit. These early authors could be viewed as membersof an incipient “Currency School,” which had long beendeveloping at the very heart of the School of Salamanca. Thesescholars typically adopt a consistent, firm stance on the legalrequirements for bank-deposit contracts, as well as a generallycritical, wary attitude toward banking.A distinct second group of theorists is led by Luis deMolina and includes Juan de Lugo and Leonardo de Lesioand, to a lesser extent, Domingo de Soto. As stated in chapter2, these authors follow Molina’s example and, like him, theydemand only a weak legal basis for the monetary bankdepositcontract and accept fractional-reserve practices, arguingthat such a contract is more a “precarious” loan ormutuum than a deposit. We will not repeat here all argumentsagainst Molina’s position on the bank-deposit contract. Sufficeit to say that underlying his position is a widespread misconceptionwhich dates back to the medieval glossators and theircomments on the institution of the depositum confessatum.What concerns us now is the fact that this second group ofscholastics was much more lenient in their criticism of bankersand went as far as to justify fractional-reserve banking. It isnot, then, altogether far-fetched to consider this group anearly “Banking School” within the School of Salamanca. Astheir English and Continental heirs would do several centurieslater, members of this school of thought not only justifiedfractional-reserve banking, in clear violation of traditionallegal principles, but also believed it exerted a highly beneficialeffect on the economy.Though Luis de Molina’s arguments concerning the bankcontract rest on a very shaky theoretical foundation and in asense constitute a regression with respect to other attitudesheld by members of the School of Salamanca, it should benoted that Molina was the first in the “Banking School” traditionto realize that checks and other documents which authorizethe payment, on demand, of certain quantities againstdeposits fulfill exactly the same function as cash. Therefore itis not true, though it is widely believed, that the nineteenthcenturytheorists of the English Banking School were the first