“In short, whichever way you look at it, the monetary irregular-deposit contract cannot be equated with the mutuum or loan contract. The two are essentially incompatible, and the existence of the demand deposit in fractional-reserve banking,despite its being a “monster” or “legal aberration,” can only be accounted for insofar as it was initially tolerated and later deliberately legalized by those exercising political power.31 Nevertheless, the fact that such a “monstrous” (according to Clemente de Diego) legal institution plays a role in the course of human interaction inevitably produces damaging economic and social consequences. In the following chapters we willexplain why fractional-reserve banking is responsible for the crises and recessions that repetitively grip the economy, and this will constitute an additional argument against the legitimacy of the bank-deposit contract, even when both parties are in perfect agreement. Furthermore, this explains the impossibility of at all times guaranteeing the repayment of these deposits without the creation of a whole government superstructure called the central bank. Once this organization has”
31That is, fractional-reserve banking conflicts with traditional legal principles and only survives as a result of an act of coercive intervention found in a mandate or governmental statutory privilege, something that other economic agents cannot take advantage of and which expressly states that it is legal for bankers to maintain a fractional-reserve ratio (Article 180 of the Spanish Commercial Code).
“established a monopoly on the issue of paper money and declared it legal tender, it has the function of ensuring the creation of all the liquid assets necessary to satisfy any immediate need private banks may have for funds. In chapter 8 we will study the resulting emergence of a centralized monetary policy, which like all attempts to coordinate society through coercive measures (socialism and interventionism), and for the same reasons, is ultimately doomed to failure. Indeed, central banks and governmental monetary policy are the main culprits in the chronic inflation which in varying degrees affects western economies, as well as in the successive and recurrent stages of artificial boom and economic recession which cause so many social upheavals. But first, let us continue with our legal analysis.”
“Furthermore a voluntary decision by two parties to enter into a contract and full knowledge of its cause (which, incidentally, is not usually the case in the present financial and banking system) are necessary conditions for the legitimacy ofan operation, but they alone are in no way sufficient to grant”
“this legitimacy in keeping with traditional legal principles. In fact if third parties suffer harm as a result of such a contract, the contract is illegitimate, null, and void, because it disrupts the public order.67 According to the analysis we present in this book, it is precisely this lack of legitimacy which pertains to fractional-reserve banking. This practice not only gives rise to the creation of additional means of payment to the detriment of all citizens, who watch as their monetary units decline inpurchasing power;68 it also deceives entrepreneurs on a broad scale, leading them to invest where and when they should not, and triggering recurrent cycles of boom and recession with a very heavy cost in human, economic and social terms.”
68We are not referring to a drop in purchasing power in absolute terms, but in relative terms, with respect to the growth which could be expected in the purchasing power of money in a banking system with a 100-percent reserve ratio. In addition, the economic consequences of current banking practices are, in this respect, identical to those of counterfeiting, an activity everyone agrees should be punished as a breach of public order, even if it is impossible to individually identify its victims.
Money, Bank Credit, and Economic Cycles, pp. 146-147; 766-777.