The Mystery Of Banking - 4

The critical problem we face as individuals when we deal with bankers is that of TRUST.

This is an old problem, noted even in the Koran. As our Islamic judgment on paper money notes:

“The first issue that arises is the one of amana (trust): Your gold is in trust with a treasurer. What does Islamic Law have to say on this issue? Allah ta’ala says in the Qur'an in Surat al 'Imran (3, 74):

Among the People of the Book there are some who,
if you trust them with a pile of gold,
will return it to you.
But there are others among them who,
if you trust them with a single dinar,
will not return it to you,
unless you stay standing over them.”

If we interpret “standing over them” in a modern sense to imply the Rule of Law, that is, a law based on Property, then the critical problem of our times is that The Law does not stand over the banker. Rather, cliques of corrupt banksters have taken over The State and The Law – and they are standing over us. Immorality and Injustice rule the world. How were things different in ancient times?

Jesus Huerta de Soto’s monumental work on “Money, Bank Credit and Economic Cycles,” is a must read for all those interested in these important matters, so grossly misunderstood in our age. (A free pdf download is available from the Mises Institute, here.) His study is, in essence, an economic analysis of juridical institutions: in other words, how The Law has been historically applied to banking, and how this critical TRUST (amana) was secured, by “standing over them.”

The book is over 800 pages long, but if I may offer its most important finding, then it is this: under Roman Law, the depositor was protected under Contract.

Roman jurisprudence treated a demand deposit as money held for “safekeeping,” to be handed back on demand. The banker was NOT free to lend out any portion of a demand deposit. To do so would invite charges of criminal misappropriation. The Law stood over the banker.

However, Romans were also free to place “term deposits” with bankers, and these were treated under Contract as “loans.” The banker could lend out of these funds, provided he returned them at the end of the prescribed term.

Roman Law thus meant 100 per cent reserves against demand deposits. If we apply this legal insight to modern times, this implies the end of the fraudulent “fractional reserve system” that multiplies “property titles without property.” Banknotes will be backed 100 per cent by specie. All depositors will be secure. Those who lend Capital to banks will face risks, and earn interest. Most importantly, bankers will not be able to create credit (deposit money) out of thin air. The problem that brought down Peel's Banking Act of 1844 will not recur.

This means Sound Money, Free Banking, and Good Law, based on Property and Contracts.

De Soto also examines the last instance of such legitimate banking in the world, the Bank of Amsterdam, which maintained a 100 per cent reserve from about 1609 to about 1780 – and drew the admiration of both Adam Smith as well as David Hume. He regrets that the Bank of England was not modeled after this honest bank; rather, it was a clone of the fraudulent Bank of Sweden, which pioneered fractional reserves, and which awards the Nobel prize in Economics today. We can be sure that Jesus Huerta de Soto will never win this prize. Ha ha.

I will discuss the Bank of Amsterdam and the critical question of “how we can move from here to there” tomorrow. Stay tuned.

In the meantime, do read Aristotle the Geek’s blog post on Interest. He deals with the historical roots of the religious bans on usury, and also the fraud that is “Islamic banking” in India. This post is a good accompaniment to my earlier post (part 3 of this series).