Creature From Jekyll Island by G. Edward

The condensed history of fractional-reserve bank-

ing; the unbroken record of fraud, booms, busts,

and economic chaos; the formation of the Bank of

England, the world's first central bank, which

became the model for the Federal Reserve System.

Banks of deposit first appeared in early Greece, concurrent with the development of coinage itself. They were known in India at the time of Alexander the Great. They also operated in Egypt as part of the public granary system. They appeared in Damascus in 1200 and in Barcelona in 1401. It was the city-state of Venice, however, which is considered the cradle of banking as we know it today.

THE BANK OF VENICE

By the year 1361, there already had been sufficient abuse in banking that the Venetian Senate passed a law forbidding bankers to engage in any other commercial pursuit, thus removing the temptation to use their depositors' funds to finance their own enterprises. They were also required to open their books for public inspection and to keep their stockpile of coins available for viewing at all reasonable times. In 1524, a board of bank examiners was created and, two years later, all bankers were required to settle accounts between themselves in coin rather than by check.

In spite of these precautions, however, the largest bank at that time, the house of Pisano and Tiepolo, had been active in lending against its reserves and, in 1584, was forced to close its doors because of inability to refund depositors. The government picked up the pieces at that point and a state bank was established, the Banco della Piazza del Rialto. Having learned from the recent experience with bankruptcy, the new bank was not allowed to make any loans. There could be no profit from the issuance of credit. The bank was required to sustain itself solely from fees for coin storage, exchanging currencies, handling the transfer of payments between customers, and notary services.

172 THE CREATURE FROM JEKYLL ISLAND

The formula for honest banking had been found. The bank

prospered and soon became the center of Venetian commerce. Its paper receipts were widely accepted far beyond the country's borders and, in fact, instead of being discounted in exchange for gold coin as was the usual practice, they actually carried a premium over coins. This was because there were so many kinds of coin in circulation and such a wide variance of quality within the same type of coin that one had to be an expert to evaluate their worth.

The bank performed this service automatically when it took the coins into its vault. Each was evaluated, and the receipt given for it was an accurate reflection of its intrinsic worth. The public, therefore, was far more certain of the value of the paper receipts than of many of the coins and, consequently, was willing to exchange a little bit more for them.

Unfortunately, with the passage of time and the fading from memory of previous banking abuses, the Venetian Senate eventually succumbed to the temptation of credit. Strapped for funds and not willing to face the voters with a tax increase, the politicians decided they would authorize a new bank without restrictions against loans, have the bank create the money they needed, and then 'borrow' it. So, in 1619, the Banco del Giro was formed, which, like its bankrupt predecessor, began immediately to create money out of nothing for the purpose of lending it to the government.

Eighteen years later, the Banco della Piazza del Rialto was absorbed into the new bank, and history's first tiny flame of sound banking sputtered and died.

Throughout the fifteenth and sixteenth centuries, banks had been springing up all over Europe. Almost without exception, however, they followed the lucrative practice of lending money which was not truly available for loan. They created excess obligations against their reserves and, as a result, every one of them failed. That is not to say that their owners and directors did not prosper. It merely means that their depositors lost all or a part of their assets entrusted for safekeeping.

THE BANK OF AMSTERDAM

It wasn't until the Bank of Amsterdam was founded in 1609 that we find a second example of sound banking practices, and the results were virtually the same as previously experienced by the Banco della Piazza del Rialto. The bank only accepted deposits and THE SECRET SCIENCE

173

steadfastly refused to make loans. Its income was derived solely from service fees. All payments in and around Amsterdam soon came to be made in paper currency issued by the bank and, in fact, that currency carried a premium over coin itself. The burgomasters and the city council were required to take an annual oath swearing that the coin reserve of the bank was intact. Galbraith reminds us: For a century after its founding it functioned usefully and with notably strict rectitude. Deposits were deposits, and initially the metal remained in storage for the man who owned it until he transferred it to another. None was loaned out. In 1672, when the armies of Louis XIV

approached Amsterdam, there was grave alarm. Merchants besieged the bank, some in the suspicion that their wealth might not be there.

All who sought their money were paid, and when they found this to be so, they did not want payment. As was often to be observed in the future, however desperately people want their money from a bank, when they are assured they can get it, they no longer want it.1

The principles of honesty and restraint were not to be long lived, however. The temptation of easy profit from money creation was simply too great. As early as 1657, individuals had been permitted to overdraw their accounts which means, of course, that the bank created new money out of their debt. In later years enormous loans were made to the Dutch East Indies Company. The truth finally became known to the public in January of 1790, and demands for a return of deposits were steady from that date forward. Ten months later, the bank was declared insolvent and was taken over by the City of Amsterdam.

THE BANK OF HAMBURG

The third and last experience with honest banking occurred in Germany with the Bank of Hamburg. For over