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

Central and Free Banking Theory 707Such an act clearly constitutes misappropriation and fraud,offenses committed during at least the early stages in thedevelopment of the modern banking system, as we saw inchapter 2.Once bankers obtained from governments the privilege ofoperating with a fractional reserve, from the standpoint ofpositive law this banking method ceased to be a crime, andwhen citizens act in a system backed in this way by law, wemust rule out the possibility of criminal fraud. Nevertheless,as we saw in chapters 1 through 3, this privilege in no wayprovides the monetary bank-deposit contract with an appropriatelegal nature. Quite the opposite is true. In most casesthis contract is null and void, due to a discrepancy concerningits cause: depositors view the transaction as a deposit, whilebankers view it as a loan. According to general legal principles,whenever the parties involved in an exchange hold conflictingbeliefs as to the nature of the contract entered into, thecontract is null and void.Moreover even if depositors and bankers agreed that theirtransaction amounts to a loan, the legal nature of the monetarybank-deposit contract would be no more appropriate.From an economic perspective, we have seen that it is theoreticallyimpossible for banks to return, under all circumstances,the deposits entrusted to them beyond the amount ofreserves they hold. Furthermore this impossibility is aggravatedto the extent that fractional-reserve banking itself tendsto provoke economic crises and recessions which repetitivelyendanger banks’ solvency. According to general legal principles,contracts which are impossible to put into practice are alsonull and void. Only a 100-percent reserve requirement, whichwould guarantee the return of all deposits at any moment, orthe support of a central bank, which would supply all necessaryliquidity in times of difficulty, could make such “loan”contracts (with an agreement for the return of the face value atany time) possible and therefore valid.The argument that monetary bank-deposit contracts areimpossible to honor only periodically and under extreme circumstancescannot redeem the legal nature of the contracteither, since fractional-reserve banking constitutes a breach of