I’ve read Rothbard’s History of Money and Banking in the U.S. and The Mystery of Banking and I get conflicting messages of how fractional reserve banking originated.
In some areas he suggests that bankers fell to the temptation to loan out deposits that were entrusted with them for safekeeping. (This is the common story). In other areas he suggest that bankers realized their notes were circulating as a money substitute and fell to the temptation to print and loan out unbacked counterfeit notes and pass them off as if they were backed by gold.
Granted there is some overlap here. If you deposit 1,000 ounces of gold with me, I can turn around and print 1,000 ounces of additional notes and loan them out. But the essence of this process is still the loaning out of someone else’s deposit (the notes are just the form of the loan). This is fundamentally different from just indiscriminately printing as many new notes as the banker desires and loaning them out.
Here’s an example from mystery of banking that is confusing:
Well which is it? Did it originate by bankers loaning out deposits or as bankers indiscriminately counterfeiting new notes?
Get to the bottom of what. I still think you are trying to look for either ONE or the OTHER by your wording.
Both examples you gave are incentives for a Fractional Reserve Bank to loan out more than they have in reserves, and incentives which existed in the beginning of banking.
It is a lot like questions on the origin of the State. There could be multiple very plausible answers at the same time which can never be proven or disproven.
Well which is it? Did it originate by bankers loaning out deposits or as bankers indiscriminately counterfeiting new notes?
Loaning out a deposit does not necesserily imply practicing FRB. If the the deposit is not on-demand and the banker loans this deposit to a third party - this is not FRB. FRB is only when an additional to the originally created claim to property is created, i.e. at the same time two separate individuals are the exclusive owners of the property in question. If a bank loans a non-on-demand deposit, it does no create fiduciary media (does not counterfeit, this is the legal term).
I’m not looking for a theory of how fractional reserves originated but rather the actual history.
Could both methods have been employed from the begining? sure. if thats the case I would like to know that. I’ve read alot of history on banking and the actual methods used to achieve fractional reserves always seems to be more speculation than fact.
Those Dishonest Goldsmiths, Selgin. This paper talks about the legal history of “irregular deposit” in England’s 17th century.
Money, according to a maxim first cited by English judges during the sixteenth century, “has no earmark,” meaning that one coin was practically indistinguishable from another of like denomination.
The original owner’s right to possession was practically unenforceable once he could no longer identify the coins to which it related.
Money, Bank Credit, and Economic Cycles, chapter 2, Jesús Huerta De Soto. It depicts the legal history of irregular deposit, too. And some historical fraudulent use of “irregular deposit” : Isocrate’s speech in “Trapezitica”, 393 B.C., see page 41 (92/938 in nagivation page), the Roman law, or pope Christian Callistus’s bankruptcy, between 185 and 190 A.D. under the rule of the Emperor Commodus, see page 55 (106/938 in navigation page)… and many others.
See chapter 3 “Attempts to legally justify fractional-reserve banking”, section 2 “Why it is impossible to equate the irregular deposit with the loan or mutuum contract : the roots of the confusion”
In fact Article 309 stipulates that :
« whenever the depositary, with the consent of the depositor, uses the goods deposited, either for himself or his business activities, or in operations ordered by the depositor, the rights and obligations of depositor and depositary shall cease, in favor of the rules and provisions applicable to the commercial loan, the commission or the contract carried out instead of the deposit. »
It seems, therefore, that some parallels exist between Article 309 of the Spanish Commercial Code and Article 1768 of the Civil Code. However, Article 307 of the Commercial Code, which regulates cash deposits, states that :
« when cash deposits are made in unmarked currency or in an open, unsealed package, the depositary shall be responsible for their preservation and safety according to the terms established in paragraph 2 of Article 306. »
And Article 306, paragraph 2 reads as follows :
« in the safekeeping of deposits, the depositary shall be accountable for any damage to the deposited goods resulting from malice or negligence, as well as from the nature of the goods or defects in them, if in such cases he fails to take necessary measures to avoid or repair the damage, notifying the depositor as soon as the damage becomes obvious. »
Nevertheless, Article 310 of the Commercial Code grants bankers a statutory privilege which legalizes the appropriation of funds deposited with them. This article specifies that :
« regardless of the provisions laid down in the preceding articles, deposits made in banks, public warehouses, credit associations or any other company shall be governed first by that company’s statutes, then by the prescriptions of this code and last by common law rules applicable to all deposits. »
…
Curiously Spanish banks, when specifying the general conditions for their different checking account contracts, avoid using the word “deposit” for fear of the legal repercussions of such a contract (especially charges of misappropriation). They also avoid the words “loan” and “credit” because, although they would be legally covered if they called monetary irregular deposits “loans,” it is obvious that business-wise, it would be much harder to attract deposits from customers if they were generally aware that in opening a checking account they are actually loaning money to the bank rather than making a deposit.
Consequently, bankers prefer to maintain the current ambiguity and confusion, since the existing contractual obscurity benefits them as long as they enjoy the privilege of using a fractional-reserve ratio and are backed by the central bank in the event of a liquidity crisis. However, bankers’ own legal classifications of their operations sometimes give them away.