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

Central and Free Banking Theory 609Lugo’s principles of prudence were an objective no bank fulfilledin practice. It seems as if Tomás de Mercado was awarethat such principles do not constitute a practical guide toguaranteeing the solvency of banks. Moreover if these principlesare ineffectual in consistently achieving the goal of solvencyand liquidity, the fractional-reserve banking system willnot be capable of honoring its commitments in all situations.Two Jesuit economists recently examined the doctrine ofthe scholastics on banking; one did so from the perspective ofthe Banking School, and the other from that of the CurrencySchool. The first is the Spanish Jesuit Francisco Belda, theauthor of an interesting paper entitled, “Ética de la creación decréditos según la doctrina de Molina, Lesio y Lugo” [“Theethics of the creation of loans, according to the doctrine ofMolina, Lesio and Lugo”]. 13 Indeed Father Belda considers itobvious that:It can be gathered from Molina’s description that in the caseof bankers there is a true creation of loans. The interventionof banks has lead to the creation of new purchasing powerpreviously nonexistent. The same money is simultaneouslyused twice; the bank uses it in its business dealings, and thedepositor uses it as well. The overall result is that the mediaof exchange in circulation are several times greater in quantitythan the real amount of cash at their origin, and the bankbenefits from all these operations.Furthermore according to Belda, Molina believesbanks can reasonably do business with the deposits of theirclients, as long as they do so prudently and do not risk beingunable to honor their own obligations on time. 14In addition, Belda states that Juan de Lugo offers13 Published in Pensamiento, a quarterly journal of philosophical researchand information, published by the Facultades de Filosofía de la Compañíade Jesús en España 73, no. 19 (January–March 1963): 53–89.14 Belda, pp. 63 and 69.