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

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 809whenever a traditional rule of conduct is broken, eitherthrough institutional government coercion or the granting ofspecial privileges by the state to certain people or organizations,sooner or later grave, undesirable consequences alwaysensue and cause serious damage to the spontaneous processof social cooperation.As we saw in the first three chapters, the traditional rule ofconduct transgressed in the banking business is the legal principlethat the safekeeping obligation, an essential element in anon-fungible deposit, manifests itself, in the contract governingthe deposit of a fungible good (for example money), in therequirement that a reserve of 100 percent of the fungible good(money) received on deposit be maintained constantly. Henceany use of such money, specifically the granting of loansagainst it, implies a violation of this principle and thus, an illegitimateact of misappropriation.At each stage in history, bankers have promptly becometempted to breach this traditional rule of conduct and makeself-interested use of their depositors’ money. At first they didso secretively and with a sense of shame, since they were stillaware of the dishonest nature of their behavior. Only later didbankers manage to make the violation of the traditional legalprinciple an open and legal practice, when they obtained fromthe government the privilege of using their depositors’ money,almost always in the form of loans, which initially were oftengranted to the government itself. Thus arose the relationshipof complicity and the coalition of interests which have becomecustomary between governments and banks and explain thecurrent “understanding” and “cooperation” between thesetwo types of institutions. Such a climate of collaboration is evident,with only subtle differences, in all western countriesunder almost all circumstances. For bankers soon realized thatthe violation of the above traditional legal principle led to afinancial activity which earned them fat profits, but which inany case required the existence of a lender of last resort, thecentral bank, to provide the necessary liquidity in themoments of crisis which experience taught would alwaysreappear sooner or later. The central bank would also beresponsible for orchestrating increases in joint, coordinated