The Origins of Fraudulent Banking and Gov. Finance Aug 18, 2009 15:00:35 GMT -5
Post by Bozur on Aug 18, 2009 15:00:35 GMT -5
The Origins of Fraudulent Banking and Government Finance: Ancient Greece
August 03, 2009
I would like to continue to share passages from Jesus Huerta De Soto's Money, Bank Credit, and Economic Cycles. The purpose for this is as follows:
1. To allow CAPS bloggers an easy reference point to cite historical information when involved in debates about fractional reserve banking, or to make certain points more clear through reference.
2. To share historical information with the many inquisitive readers at CAPS who have clearly exhibited a demand for said information.
3. To refute any and all reasons for maintaining the status quo in fractional reserve banking.
Fractional Reserve Banking is not:
1. A new feature of the modern economy.
2. Required to have a functioning and dynamic modern economy.
3. A respectable profession.
4. The same as loan banking.
5. Independent of government politicking nor has it ever been successfully regulated by government.
6. Any different today than from the hundreds of different attempts at fractional reserve banking that have tried and failed, losing wealth for millions of customers, throughout history.
7. Any more stable today than it has been. Research bank failures in America by year if you doubt this statement.
In the reading below you will find the first historical examples of fractional reserve banking and the Greek government's attempts to deal with these misappropriations. In following posts, we will trace history all the way up to present day. Then we will dismiss the ex post facto justifications presented by the intelligentsia and spoon fed to state educated children for the last 150 years.
I started this series with the last honest bank: The Bank of Amsterdam from 1609-1780, which operated with at or very near 100% cash reserves for the entire time and was the most respected bank in world history. Sadly, even they eventually fell prey to the lure of misappropriating the fungible good. There was a purpose to this as well. So many in the CAPS community want an example of how it worked rather than an understanding of the theoretical constructs that make it possible. We give them the examples and save the logic and reason for the rest of us.
Why am I permitted to post De Soto's work? Former president of the Ludwig Von Mises Institute Lew Rockwell owns the copyright for all works submitted to LvMI. Subsequently he releases all the information for free. The genius here is that it prevents others from copyrighting and attempting to sell or subvert the material. It is all of ours for free. On a side note, this has made Lew Rockwell among the most influential men in the world.
The entire book is available for free on pdf here. Don't forget to read the Notes section that I will post in the first comment. De Soto's notes are sometimes better than the material.
I hope you enjoy the read.
David in Qatar
In ancient Greece temples acted as banks, loaning money to individuals and monarchs. For religious reasons temples ere considered inviolable and became a relatively safe refuge for money. In addition, they had their own militias to defend them and their wealth inspired confidence in depositors.
From a financial standpoint the following were among the most important Greek temples: Apollo in Delphi, Artemis n Ephesus, and Hera in Samos.
TRAPEZITEI OR GREEK BANKERS
Fortunately certain documentary sources on banking in reece are available to us. The first and perhaps most important s Trapezitica, (4) written by Isocrates around the year 393 B.C. (5) It is a forensic speech in which Isocrates defends the interests of the son of a favorite of Satyrus, king of Bosphorus. The son accuses Passio, an Athenian banker, of misappropriating a deposit of money entrusted to him. Passio was an exslave of other bankers (Antisthenes and Archetratos), whose
trust he had obtained and whose success he even surpassed, for which he was awarded Athenian citizenship. Isocrates’s forensic speech describes an attempt by Passio to appropriate deposits entrusted to his bank by taking advantage of his depositor’s difficulties, for which he did not hesitate to deceive, forge, and steal contracts, bribe, etc. In any case, this speech is so important to our topic that it is worth our effort to consider some of its passages in detail.
Isocrates begins his arguments by pointing out how hazardous it is to sue a banker, because
"deals with bankers are made without witnesses and the injured parties must put themselves in jeopardy before such people, who have many friends, handle large amounts of money and appear trustworthy due to their profession." (6)
It is interesting to consider the use bankers have always made of all of their social influence and power (which is enormous, given the number and status of figures receiving loans from them or owing them favors) to defend their privileges and continue their fraudulent activity. (7)
Isocrates explains that his client, who was planning a trip, deposited a very large amount of money in Passio’s bank. After a series of adventures, when Isocrates’s client went to withdraw his money, the banker claimed he “was without funds at the moment and could not return it.” However, the banker, instead of admitting his situation, publicly denied the existence of any deposit or debt in favor of Isocrates’s client. When the client, greatly surprised by the banker’s behavior, again claimed payment from Passio, he said to the banker,
"after covering his head, cried and said he had been forced by economic difficulties to deny my deposit but would soon try to return the money to me; he asked me to take pity on him and to keep his poor situation a secret so it would not be discovered he had committed fraud." (8)
It is therefore clear that in Greek banking, as Isocrates indicates iin his speech, bankers who received money for safekeeping and custody were obliged to safeguard it by keeping it available to their clients. For this reason, it was considered fraud to employ that money for their own uses. Furthermore,
the attempt to keep this type of fraud a secret so people would conserve their trust in bankers and the latter could continue their fraudulent activity is very significant. Also, we may deduce from Isocrates’s speech that for Passio this was not an isolated case of fraud, an attempt to appropriate the money of a client under favorable circumstances, but that he had difficulty returning the money because he had not maintained a 100-percent reserve ratio and had used the deposited money
in private business deals, and he was left with no other “escape” than to publicly deny the initial existence of the deposit.
Isocrates continues his speech with more words from his client, who states:
"Since I thought he regretted the incident, I compromised and told him to find a way to return my money while saving face himself. Three days later we met and both promised to keep what had happened a secret; (he broke his promise, as you will find later in my speech). He agreed to sail with ne to Pontus and to return the gold to me there, in order to cancel the contract as far from this city as possible; that way, no one from here would find out the details of the cancellation, and upon sailing back, he could say whatever he chose."
Nevertheless, Passio denies this agreement, causes the disappearance of the slaves who had been witnesses to it and forges and steals the documents necessary to try to demonstrate that the client had a debt with him instead of a deposit. given the secrecy in which bankers performed most of their activities, and the secret nature of most deposits, (9) witnesses ere not used, and Isocrates was forced to present indirect witnesses who knew the depositor had taken a large amount of money and had used Passio’s bank. In addition, the witnesses knew that at the time the deposit was made the depositor had changed more than one thousand staters into gold. Furthermore, Isocrates claims that the point most likely to convince the judges of the deposit’s existence and of the fact that Passio tried to appropriate it was that Passio always refused to
"turn over the slave who knew of the deposit, for interrogation under torture. What stronger evidence exists in contracts with bankers? We do not use witnesses with them." (10)
Though we have no documentary evidence of the trial’s verdict, it is certain that Passio was either convicted or arrived at a compromise with his accuser. In any case, it appears that afterward he behaved properly and again earned the trust of the city. His house was inherited by an old slave of his, Phormio, who successfully took over his business.
More interesting information on the activity of bankers in Greece comes from a forensic speech written by Demosthenes in favor of Phormio. Demosthenes indicates that, at the time of Passio’s death, Passio had given fifty talents in loans still outstanding, and of that amount, “eleven talents came from bank deposits.” Though it is unclear whether these were time or demand deposits, Demosthenes adds that the banker’s profits were “insecure and came from the money of others.” Demosthenes
concludes that “among men who work with money, it is admirable for a person known as a hard worker to also be honest,” because “credit belongs to everyone and is the most important business capital.” In short, banking was based on depositors’ trust, bankers’ honesty, on the fact that bankers should always keep available to depositors money placed in demand deposits, and on the fact that money loaned to bankers for profit should be used as prudently and sensibly as possible. In any case, there are many indications that Greek bankers did not always follow these guidelines, and that they used for themselves money on demand deposit, as described by Isocrates in Trapezitica and as Demosthenes reports of other bankers (who went bankrupt as the result of this type of activity) in his speech in favor of Phormio. This is true of Aristolochus, who owned a field “he bought while owing money to many people,” as well as of Sosynomus, Timodemus, and others who went bankrupt, and “when it was necessary to pay those to whom they owed money, they all suspended payments and surrendered their assets to creditors.” (11)
Demosthenes wrote other speeches providing important information on banking in Greece. For example, in “Against Olympiodorus, for Damages,” (12) he expressly states that a certain
"some money on demand deposit in the bank of Heraclides, and the money was spent on the burial and other ritual ceremonies and on the building of the funerary monument."
In this case, the deceased made a demand deposit which was withdrawn by his heirs as soon as he died, to cover the costs of burial. Still more information on banking practices is offered in the speech “Against Timothy, for a Debt,” in which Demosthenes affirms that
"bankers have the custom of making entries for the amounts they hand over, for the purpose of these funds, and for deposits people make, so that the amounts given out and those deposited are recorded for use when balancing the books." (13)
This speech, delivered in 362 B.C., is the first to document that bankers made book entries of their clients’ deposits and withdrawals of money. (14) Demosthenes also explains how checking accounts worked. In this type of account, banks jade payments to third parties, following depositors’ instructions. (15) As legal evidence in this specific case, Demosthenes
"adduced the bank books, demanded copies be made, and after showing them to Phrasierides, I allowed him to inspect the books and make note of the amount owed by this individual." (16)
Finally, Demosthenes finishes his speech by expressing his concern at how common bank failures were and the people’s great indignation against bankers who went bankrupt. Demosthenes mistakenly attributes bank failures to men who
"in difficult situations request loans and believe that credit should be granted them based on their reputation; however, once they recover economically, they do not repay the money, but instead try to defraud." (17)
We must interpret Demosthenes’s comment within the context of the legal speech in which he presents his arguments. The purpose of the speech was precisely to sue Timothy for not returning a bank loan. It would be asking too much to expect Demosthenes to have mentioned that most bank failures occurred because bankers violated their obligation to safeguard demand deposits, and they used the money for themselves and put it into private business deals up to the point when, for some reason, the public lost trust in them and tried to withdraw their deposits, finding with great indignation that the money was not available.
On various occasions research has suggested Greek bankers usually knew they should maintain a 100-percent reserve ratio on demand deposits. This would explain the lack of evidence of interest payments on these deposits, as well as the proven fact that in Athens banks were usually not considered sources of credit. (18) Clients made deposits for reasons of safety and expected bankers to provide custody and safekeeping, along with the additional benefits of easily-documented cashier services and payments to third parties. Nevertheless, the fact that these were the basic principles of legitimate banking did not prevent a large group of bankers from yielding to the temptation to (quite profitably) appropriate deposits, a fraudulent activity which was relatively safe as long as people retained their trust in bankers, but in the long run it was destined to end in bankruptcy. Moreover, as we will illustrate with various historical examples, networks of fraudulent bankers operating, against general legal principles, with a fractional-reserve ratio bring about credit expansion (19) unbacked by real savings, leading to artificial, inflationary economic booms, which finally revert in the shape of crises and economic recessions, in which banks inexorably tend to fail.
Raymond Bogaert has mentioned the periodic crises affecting banking in ancient Greece, specifically the economic and financial recessions of 377–376 B.C. and 371 B.C., during which the banks of Timodemus, Sosynomus and Aristolochus (among others) failed. Though these recessions were triggered by the attack of Sparta and the victory of Thebes, they emerged following a clear process of inflationary expansion in which fraudulent banks played a central part. (20) Records also reflect the serious banking crisis which took place in Ephesus following the revolt against Mithridates. This crisis motivated authorities to grant the banking industry its first express, historically-documented privilege, which established a ten-year deferment on the return of deposits. (21)
In any case, the bankers’ fraudulent activity was extremely “profitable” as long as it was not discovered and banks did not fail. We know, for example, that the income of Passio reached 100 minas, or a talent and two-thirds. Professor Trigo Portela has estimated that this figure in kilograms of gold would be equivalent today to almost two million dollars a year. This does not seem an extremely large amount, though it was really quite spectacular, considering most people lived at mere subsistence level, ate only once a day and had a diet of cereals and vegetables. Upon his death, Passio’s fortune amounted to sixty talents; given a constant value for gold, this would add up to nearly forty-four million dollars. (22)