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

38 Money, Bank Credit, and Economic Cyclesthose who from the beginning received money from their fellowcitizens for safekeeping knew the obligations they weretaking on, specifically, to guard the tantundem like a good parent,to keep it constantly available to the depositor. This is preciselythe meaning of safekeeping in a deposit contract of afungible good. However, while the legal nature of the irregulardeposit contract is clear and easy to understand, humannature is imperfect and weak. Therefore it is comprehensiblethat those receiving monetary deposits were tempted to violatethe safekeeping obligation and use for themselves moneythat should have been kept available to others. The temptationwas very strong: without depositors realizing it, bankerscould handle large amounts of money; and if they used it well,it could generate substantial profit or interest, which bankerscould keep without openly harming anyone. 1 Given the weaknessof human nature and the almost irresistible temptationfelt by bankers, it is comprehensible that the traditional principlesof safekeeping on which the monetary irregular-depositcontract is based were violated from the very beginning in aconcealed manner. In addition, given the abstract, confusingnature of monetary relations, most citizens and the majority ofauthorities in charge of enforcing moral and legal principlesfailed to notice this phenomenon, except in rare instances.And once abuses and cases of fraud began to surface andbecame better understood, the institution of banking had1 We are referring to the most obvious source of profit, which initiallymotivated bankers to misappropriate depositors’ money. In chapter 4we will examine a source of much greater earnings: the power ofbankers to issue money or create loans and deposits out of nowhere. Theresulting profit is immensely larger; however, as it arises from anabstract process, it is certain not even bankers were fully aware of ituntil very late in the evolution of finance. Nevertheless, the fact thatthey did not understand, but only intuited, this second type of profitdoes not mean they failed to take advantage of it completely. In chapter4 we will explain how bankers’ violation of traditional legal principlesthrough fractional-reserve banking makes it possible to create loans outof nowhere, the return of which is then demanded in hard cash (withinterest to boot!). In short, we are dealing with a constant, privilegedsource of funding in the shape of deposits bankers create out of nothingand constantly employ for their own uses.