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Money, Bank Credit & Economic Cycles

This book comprises nine chapters. The first describes the legal essence of the monetary irregular-deposit contract, paying special attention to the main characteristics distinguishing it from a loan contract, the different legal logic inherent in these two institutions and their mutual incompatibility at a fundamental level.

Chapter 2 is a historical study of economic events and an examination of the ways in which the traditional legal principle governing the irregular-deposit contract has been corrupted over time, mainly due to the temptation felt by the first bankers to use their depositors’ money to their own benefit. The intervention of the political establishment has also played an important role in this process.

Chapter 3 considers different theoretical attempts to come up with a new contractual framework in which to classify the monetary bank-deposit contract. Such attempts are aimed at justifying banks’ lending of demand-deposit funds to third parties but these attempts at justification are riddled with an insoluble logical contradiction and therefore doomed to failure.

Chapters 4, 5, 6, and 7 comprise the heart of the economic analysis of the bank-deposit contract as it has developed over time; that is, using a fractional-reserve ratio in violation of traditional legal principles. It explains why Hayek’s insightful rule rings true in the banking field as well. This rule states that whenever a traditional legal principle is violated, sooner or later there are serious harmful effects on society. It concludes that the successive stages of boom, crisis, and economic recession recurring in the market result from the violation of the traditional legal principle on which the monetary bank-deposit contract should be based. They stem from the privilege bankers have come to enjoy and have been granted in the past by governments for reasons of mutual interest. It studies the theory of economic cycles in depth and critically analyze the alternative explanations offered by the monetarist and Keynesian schools for this type of phenomena.

Chapter 8 focuses on the central bank as a lender of last resort. The creation of this institution resulted inevitably from certain events. When the principles which should govern the irregular-deposit contract are violated, such acute and inescapable effects appear that private bankers soon realized they needed to turn to the government for an institution to act on their behalf as lender of last resort and provide support during stages of crisis, which experience demonstrated to be a recurrent phenomenon.

The ninth and last chapter presents an ideal, coherent model for a financial system which respects traditional legal principles and is thus based on the adoption of a 100-percent reserve requirement in banking. A summary of main conclusions wraps up the book, along with some additional considerations on the advantages of the proposed financial system.

Click here to open "Money, Bank Credit & Economic Cycles" by Jesus Huerta de Soto (PDF 4MB)

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