Fractional reserve banking
In a loan contract, the availability of money is transferred to the borrower, who must return in at the end of the term and pay the interest. The borrower is free to use in in any way. In a deposit contract, the money is in custody and the depositor can withdraw it on demand, it is available to him at all times. The borrower must keep a 100% cash reserve, if the reserve is smaller it is known as fractional reserve banking.[1]
Legalization
Roman law recognized that bankers were often tempted to use the deposits for themselves. To penalize these actions, they should be not only charged with theft, but to pay interest "so that, in fear of these penalties, men will cease to make evil, foolish and perverse use of deposits".[1]
In early medieval Europe, the bankers preserved their deposits fully at first, but later began to use them for their own purposes, creating deposits and granting credits out of nowhere. Since the canonical law banned the charging of interest on loans, bankers would instead pay "penalties" for "delays" in payment and in effect pay interest on a disguised loan, and justified any misappropriations on this basis. This practice was defended by some scholars, while others wanted to expose all hidden loans and equated all deposit contracts for loans. As a result, the distinction between them was obscured. Experts failed to clear up the resulting legal chaos until the end of the nineteenth century.
The authorities failed to enforce sound banking practices, and often granted banks a government license to operate with a fractional reserve, while taking advantage of easy loans to finance governments and public officials. Some rulers created government banks to reap the profits. But banks were still required to guarantee deposits.[2]
As late as twentieth century, court decisions in Europe have upheld the demand for a 100-percent reserve requirement. In 1927, the Court of Paris convicted a banker for the crime of misappropriation for having used the funds deposited with him by a client, confirmed in 1934. After the failure of the Bank of Barcelona the Spanish Supreme Court also pronounced, that "the depositary does not acquire the right to use the deposit for his own purposes".[1]
References
- ↑ 1.0 1.1 1.2 Jesús Huerta de Soto. "Money, Bank Credit, and Economic Cycles". 1. The Legal Nature of the Monetary Irregular Deposit Contract, p. 1-36, referenced 2009-11-07.
- ↑ Jesús Huerta de Soto. "Money, Bank Credit, and Economic Cycles". 3. Bankers in the Late Middle Ages, p. 59-69, referenced 2009-11-05.
External links
- Fractional-reserve banking on Wikipedia
- "Legal Tender Laws and Fractiona-Reserve Banking"(pdf) by Jörg Guido Hülsmann
- Fractional Reserve banking and boom-bust cycles by Frank Shostak