The Age-Old Alliance between Banks and the State
For millennia, bankers have succumbed to the temptation to use depositors' funds for their own benefit. From the earliest days of banking, namely in Babylonia perhaps as early as 3,500 BCE and certainly by 2,000 BCE, bankers who accepted money for deposit and safekeeping recognised that they were thereby assuming important moral as well as commercial responsibilities. Alas, although the principles underlying the irregular deposit contract are hard and clear, human nature is imperfect and weak.
Given the constrained or "tragic" reality of human nature, it's reasonable to suppose that from the beginning bankers receiving deposits were tempted to violate the obligation of safekeeping and to use for themselves the [money] that they should have kept continuously available to depositors. It's equally reasonable to suppose that, from the start, this temptation was very strong: without depositors' knowledge, small numbers of bankers could "recycle" very large amounts of money; and if they "laundered" it well, they could generate substantial profit. Bankers could keep this profit without — no doubt most tried to convince themselves — openly harming anyone.
For more than two millennia, and in particular during the past two centuries in the West, the deliberate and emphatic intervention of the political establishment in favour of bankers and against depositors has underpinned and "legalised" the systematic violation of traditional legal principles. Far from defending the property rights of depositors, the state has energetically supported bankers' infringements of these rights. More generally, and as St. Augustine famously put it in The City of God, secular rulers are "gangs of criminals on a grand scale." Augustine saw clearly something that utterly escapes today's mainstream: the state originated not through a "social contract" or any voluntary arrangement, but rather through brute force, systematic robbery and mass murder:
|A gang is a group of men under the command of a leader, bound by a compact of association, in which the plunder is divided according to an agreed convention. If this villainy wins so many recruits from the ranks of the demoralised that it acquires territory, establishes a base, captures cities and subdues peoples, it then openly arrogates to itself the title of kingdom, which is conferred on it in the eyes of the world, not by the renunciation of aggression, but by the attainment of impunity. For it was a witty and truthful rejoinder which was given by a captured pirate to Alexander the Great. The king asked the fellow, "What is your idea, in infesting the sea?" And the pirate answered, with uninhibited insolence, "the same as yours, in infesting the earth! But because I do it with a tiny craft, I'm called a pirate: because you have a mighty navy, you're called an emperor."|
Always eager to secure new sources of finance, politicians and bureaucrats have long turned to bankers entrusted with others' deposits — and have ruthlessly exploited these funds. They have also granted to bankers all sorts of privileges, chiefly the authorisation to use their depositors' funds for their own benefit (on condition that a considerable portion of these funds be lent to the state). Hence a distinguishing feature of banking that has been present from its birth and remains firmly in place today: the intimate complicity and solidarity between rulers and bankers. The constant purpose of their alliance over many years has been to defraud the depositor and taxpayer, and thereby to enrich bankers and the state.
This chapter surveys three sets of examples (classical Greece and Rome, the resurgence of banking in medieval Italian cities and the advent of modern banking in the 18th century) which illustrate the corruption of the traditional legal principles governing the monetary irregular deposit contract.
Despite vast differences of culture, economy and technology, the evolution of banking in these contexts has produced remarkably similar results. In each case we observe that when bankers and political authorities violate traditional legal principles, harmful effects ensue — not just "micro-level" damage such as the failures of individual banks, but also "macro-level" injury such economic crises (depressions) and financial crises including the collapse of banking systems.
From the start, similar frauds have been committed and the same damaging effects have almost inevitably followed. Over the millennia, this process has occurred again and again, up to the present day. Hence the "Global Financial Crisis" is merely the latest in a long and dismal series of crises that stem from the same ultimate cause. The history of banking is the history of violations of the legal principles governing the monetary irregular deposit contract. These abuses eventually bankrupt banks and impoverish depositors and sometimes whole economies. Truly, the history of banking is the history of bank crises and bank failures.
Banking in Ancient Greece and Rome
In ancient Greece, temples also acted as banks. From a financial point of view, Apollo in Delphi, Artemis in Ephesus and Hera in Samos were among the most important temples. The fact that temples were regarded as inviolable, plus the fact that the larger ones possessed their own militias, probably strengthened the confidence of depositors. Alas, the danger to depositors lurked inside as well as outside the temple's walls.
Bankers in ancient Greece knew they should maintain a 100% reserve ratio on demand deposits. They knew, in other words, that if they received (say) a total of 1,000 units of gold as deposits, then they should retain an equivalent amount in their vaults. How so? There is no evidence that deposits paid interest, and there is very strong evidence that people did not regard banks as sources of credit. For reasons of safety, clients deposited money in banks; and for reasons of convenience, they expected bankers to provide cashier services and payments to third parties.
Alas, some and perhaps many bankers yielded to the temptation to use deposits for their own purposes. This deceptive activity was relatively safe as long as people continued to trust bankers; yet time after time it triggered the banks' bankruptcy. Accordingly, periodic financial and economic crises decimated banks in the Hellenic world.
Roman law clearly perceived the critical difference between the deposit contract and the [contract of lending to the bank]: indeed, we will see that Roman law understood this vital distinction more clearly than any of its successors during the next two thousand years. As in the Hellenistic world, so too in the Roman: although the depositor could authorise the bank to make payments in his name, deposits did not pay interest and could not be legally lent. Unfortunately, the insights of Roman jurists and the force of Roman law provided no guarantee that bankers would behave honestly and refrain from using money from demand deposits for their own benefit. Although their number was perhaps smaller than in the Hellenic world, there was no shortage of unscrupulous Roman bankers who misappropriated their depositors' funds and eventually bankrupted themselves and their depositors.
Under Roman rule, many large temples continued to serve as banks. One of the most important was located in Jerusalem. At Herod's Temple, Hebrews of all walks of life traditionally deposited money as well as exchanged currencies. This fact provides additional context with which to interpret the expulsion of the "money changers" recorded near the end of the Synoptic Gospels (Matthew 21:12-17, 21:23-27; Mark 11:15-19, 11:27-33; Luke 19:45-48, 20:1-8) and towards the beginning of the Gospel of John (2:12-25). According to Matthew, upon entering the temple Jesus "drove out all who sold and bought in the temple, and he overturned the tables of the money changers and the seats of those who sold pigeons. He said to them, "It is written, 'My house shall be called a house of prayer,' but you make it a den of robbers."
In one sense, the translation of this passage from Latin into English is not completely accurate. Instead of "moneychangers" it should read "bankers." This latter usage accords more closely to the literal sense (mensas numulariorum) of the Vulgate. If so, then these evangelical texts confirm that Herod's Temple acted as a bank where the general public deposited money. Do we have any particular reason to suppose that bankers at the Temple resisted the temptation to use deposited funds for their own purposes? If not, then in addition to the primary (spiritual) interpretation the clearing of the Temple by Jesus can also be seen as a protest against abuses stemming from an illicit activity (namely the misappropriation of demand deposits).
This is an excerpt from Chris Leithner's book The Evils of Martin Place discusses the ancient hiostory of fractional reserve banking.
Source: Leithner, Chris (2011-11-24). The Evil Princes of Martin Place: The Reserve Bank of Australia, the Global Financial Crisis and the Threat to Australians' Liberty and Prosperity (p. 105). Kindle Edition.