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in this chapter we will present various examples to show
how bankers have throughout history violated traditional
legal principles in the irregular deposit, and we will con-
sider the reasons behind the failure of society’s regulatory
mechanisms to put a stop to these abuses. We will also con-
template the role of governments in this process. Far from
endeavoring to scrupulously defend property rights, they
supported bankers’ improper activity almost from the begin-
ning and granted exemptions and privileges in order to take
advantage of this activity for their own uses. Thus the intimate
complicity and solidarity traditionally present (and still exis-
tent) in relations between state and bank institutions. To
understand why the different attempts to legally justify abuses
have failed, we must first properly understand the legally cor-
rupt origin of fractional reserves in monetary bank deposits.
We will examine attempts at justification in chapter 3.
1
INTRODUCTION
In the last chapter we presented the clear, coherent legal
nature of the monetary irregular-deposit contract. Undoubtedly,
37
those who from the beginning received money from their fel-
low citizens for safekeeping knew the obligations they were
taking on, specifically, to guard the tantundem like a good par-
ent, to keep it constantly available to the depositor. This is pre-
cisely the meaning of safekeeping in a deposit contract of a
fungible good. However, while the legal nature of the irregu-
lar deposit contract is clear and easy to understand, human
nature is imperfect and weak. Therefore it is comprehensible
that those receiving monetary deposits were tempted to vio-
late the safekeeping obligation and use for themselves money
that should have been kept available to others. The temptation
was very strong: without depositors realizing it, bankers
could handle large amounts of money; and if they used it well,
it could generate substantial profit or interest, which bankers
could keep without openly harming anyone.1Given the weak-
ness of human nature and the almost irresistible temptation
felt by bankers, it is comprehensible that the traditional prin-
ciples of safekeeping on which the monetary irregular-deposit
contract is based were violated from the very beginning in a
concealed manner. In addition, given the abstract, confusing
nature of monetary relations, most citizens and the majority of
authorities in charge of enforcing moral and legal principles
failed to notice this phenomenon, except in rare instances.
And once abuses and cases of fraud began to surface and
became better understood, the institution of banking had
38
Money, Bank Credit, and Economic Cycles
1We are referring to the most obvious source of profit, which initially
motivated bankers to misappropriate depositors’ money. In chapter 4
we will examine a source of much greater earnings: the power of
bankers to issue money or create loans and deposits out of nowhere. The
resulting profit is immensely larger; however, as it arises from an
abstract process, it is certain not even bankers were fully aware of it
until very late in the evolution of finance. Nevertheless, the fact that
they did not understand, but only intuited, this second type of profit
does not mean they failed to take advantage of it completely. In chapter
4 we will explain how bankers’ violation of traditional legal principles
through fractional-reserve banking makes it possible to create loans out
of nowhere, the return of which is then demanded in hard cash (with
interest to boot!). In short, we are dealing with a constant, privileged
source of funding in the shape of deposits bankers create out of nothing
and constantly employ for their own uses.
already been in operation so long and had acquired such
power that it was practically impossible to effectively curb
corruption. Moreover, the gradual discovery authorities made
of banks’ immense power to create money explains why, in
most instances, governments ended up becoming accomplices
to banking fraud, granting privileges to bankers and legaliz-
ing their improper activity, in exchange for the opportunity to
participate, directly or indirectly, in their enormous profits. In
this way they established an important alternative source of
state funding. Furthermore, this corruption of the state’s tra-
ditional duty to define and defend property rights was
encouraged by governments’ enormous, recurrent need for
resources, due to their historical irresponsibility and lack of
financial control. Thus, a more and more perfect symbiosis or
community of interests was formed between governments
and bankers, a relationship which to a great extent still exists
today.
However, despite the complexity of the above situation,
certain shrewd thinkers long ago began to understand it. Doc-
tor Saravia de la Calle, in his book, Instrucción de mercaderes,
attributes the destructive effects of banking to the fact that
man’s insatiable greed has so thoroughly banished his fear
of God and sense of shame, and I even believe it is due to the
neglect of the republic’s spiritual and temporal leaders.2
If Saravia de la Calle shows any weakness, it is an excess
of charity toward the leaders. He correctly attributes fraud in
the irregular deposit to men’s frailty or greed, but he only
holds the leaders responsible for their “neglect” in not being
able to end abuses. Historical events reveal that, apart from
demonstrating undeniable neglect, on many occasions gov-
ernments have clearly and explicitly taken advantage of the
large profits of the banking “business.” In addition, we will
see that, in other instances, authorities have not only granted
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 39
2Luis Saravia de la Calle, Instrucción de mercaderes (Medina del Campo:
Pedro de Castro, 1544; Madrid: Colección de Joyas Bibliográficas, 1949),
chap. 8, p. 179.
the bankers privileges so they could carry out their activities
with impunity in exchange for specific favors, but they have
even created government banks in order to directly take
advantage of the corresponding profits.
Although banking activities developed long ago and prac-
tically coincided with the appearance of money, the dawn of
trade, and the first steps in the division of labor3, we will pres-
ent and illustrate the violation of traditional legal principles in
40
Money, Bank Credit, and Economic Cycles
3The archeologist Lenor Mant discovered among the ruins of Babylon a
clay tablet with an inscription attesting to intercity trading and the use
of commercial and financial means of payment. The tablet mentions an
Ardu-Nama (the drawer, of the city of Ur) ordering a Marduk-Bal-at-
Irib (the drawee) of the city of Orkoe to pay in Ardu-Nama’s name the
sum of four minas and fifteen shekels of silver to Bel-Abal-Iddin within
a set time period. This document is dated the 14th of Arakhsamna, year
2 of the reign of Nabonaid. For his part, the researcher Hilprecht dis-
covered in the ruins of the city of Nippur a total of 730 baked clay tablets
with inscriptions, thought to have belonged to the archives of a bank
existing in the city in 400 B.C., called Nurashu and Sons (see “Origen y
desenvolvimiento histórico de los bancos,” in the Enciclopedia universal
ilustrada europeo-americana [Madrid: Editorial Espasa-Calpe, 1979], vol.
7, p. 477). In turn, Joaquín Trigo, apart from offering us the above infor-
mation, reports that around the year 3300 B.C. the temple of Uruk owned
the land it exploited, received offerings and deposits and granted loans
to farmers and merchants of livestock and grain, becoming the first bank
in history. In the British Museum we also find tablets recording the finan-
cial operations of the bank Sons of Egibi. The sequence of the tablets
demonstrates that from the time of the Assyrians, and for more than 180
years, the institution was controlled by a true financial dynasty. The
Code of Hammurabi facilitated the transfer of property and strictly reg-
ulated the rights associated with it, as well as commercial activity, limit-
ing interest rates and even establishing public loans at 12.5 percent. Part-
nership agreements were also regulated, as was the keeping of accounts
of operations. The Manu Smriti of India also makes reference to banking
and financial operations. In short, remaining records indicate that finan-
cial operations occurred between 2300 and 2100 B.C., though the spread
of the “banking” business began between 730 and 540 B.C., when Assyr-
ian and New Babylonian dynasties ensured safe trade, which gave rise
to specialized banks. This activity also spread to Egypt, and later from
there to the Ancient Greek world (Joaquín Trigo Portela, “Historia de la
banca,” chapter 3 of the Enciclopedia práctica de la banca (Barcelona: Edito-
rial Planeta, 1989), vol. 6, esp. pp. 234–37).
the irregular deposit by bankers and authorities in three dif-
ferent historical instances: the Greco-Roman world; the Mediter-
ranean trading cities of the late Middle Ages and the begin-
ning of the Renaissance; and finally, the emergence of the first
important government banks beginning in the seventeenth
century. Moreover, the evolution of banking in these three sep-
arate historical instances produced to a large extent the same
characteristic results. Indeed, in each case we observe that as
people began to violate traditional legal principles, harmful
effects followed, not only in the shape of bank failures, but
also profound financial and economic crises. In the following
historical examples the same frauds are committed, followed
by the same typical stages and results, and the same failed
attempts to enforce traditional principles of safekeeping. The
same damaging effects then inexorably follow, and this process
is repeated again and again, up to the present day. Let us now
examine the violation of legal principles and authorities’ com-
plicity in banking frauds and abuses throughout history.
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