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

746 Money, Bank Credit, and Economic Cycleslegal principles in the irregular deposit, anyone who receivesmoney on deposit is required to keep on hand at all times atantundem equal to 100 percent of the money received, it isobvious that depositors will be able to withdraw the amountdeposited at any time without placing any financial strain onthe corresponding banks.Of course banks, in the exercise of activities other thandeposit banking, in their role as loan intermediaries for example,may certainly encounter economic problems as a result ofentrepreneurial errors or poor management. However inthese cases the simple application of the principles of bankruptcylaw 46 would be sufficient to liquidate this type of bankoperation in an orderly fashion without affecting in any way theguaranteed return of demand deposits. From a legal and economicpoint of view, this second type of bank “crisis” is completelyunrelated, both qualitatively and quantitatively, withthe traditional crises which have plagued banks since theybegan to operate with a fractional reserve. The only way toavoid these traditional crises is precisely to do away with fractional-reservebanking.2. The Proposed System Prevents Cyclical Economic Crises. Aswe have seen based on both theory and history, successivecycles of artificial boom and economic recession have afflictedmarket economies since banks began to function with a fractionalreserve. In addition, the damaging effects of these cyclesbecame even stronger when governments granted banks theprivilege of legally operating in this manner. The damagebecame most acute with the creation of the central bank as alender of last resort designed to supply the system with the necessaryliquidity in times of trouble. For while the central bankhas reduced the frequency of bank crises, it has not been capableof ending financial crises and economic recessions, which, incontrast, have in many cases become deeper and more severe.A banking system in tune with traditional property-lawprinciples (i.e., a 100 percent reserve) would immunize our46 See Cabrillo, Quiebra y liquidación de empresas: un análisis económico delderecho español.