суббота, 30 июня 2012 г.


The doctrine equating the monetary irregular-deposit contract with the loan or mutuum contract has also prevailed in Anglo-Saxon common law, via the creation of law in the binding case system. At the end of the eighteenth century and throughout the first half of the nineteenth, various lawsuits were filed by which depositors, upon finding they could not secure the repayment of their deposits, sued their bankers for misappropriation and fraud in the exercise of their safekeeping obligations. Unfortunately, however, British case-law
judgments fell prey to pressures exerted by bankers, banking customs, and even the government, and it was ruled that the monetary irregular-deposit contract was no different from the loan contract, and therefore that bankers making self-interested use of their depositors’ money did not commit misappropriation. Of all of these court rulings, it is worthwhile to consider Judge Lord Cottenham’s decision in Foley v. Hill and others in 1848. Here the judge arrives at the erroneous conclusion that the money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in a haphazardous speculation; he is not
bound to keep it or deal with it as the property of his principal, but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to
that paid into his hands.
Considering this type of ruling, it is not surprising that Richard Cantillon fled from France to England, where financial practices were much more lax, and as we have seen, court rulings ended up defending the same line of argument he
used in his defense. In continental Europe, in contrast, the Roman legal tradition still exerted great influence. Roman jurists had impeccably formulated the nature of the monetary irregular deposit, basing it on the safekeeping obligation and the unlawfulness of banks’ appropriation of deposited funds.
Hence Richard Cantillon’s fear is understandable. He fled continental Europe at a time when the Bank of Amsterdam was still operating with its full prestige and a 100-percent reserve ratio. Also, the concept of irregular deposit began to
return to its classical legal roots (which outlawed fractional-reserve banking). It had already become clear that all banking systems which had been based on a fractional reserve had failed (i.e., the systematic failure of European banks of the late Middle Ages, of banks in Seville and Italy in the sixteenth and
seventeenth centuries and the system of Law in eighteenth-century France), and judges had regularly pronounced rulings against bankers’ appropriation of funds on deposit (and as we know, such decisions have even been made well into the twentieth century in France and Spain).
We must emphasize that, at least with respect to the institution that concerns us (the irregular deposit), clearly the Anglo-Saxon common law system has less effectively guaranteed the defense of property rights and the correct regulation
of social interaction than the legal system of continental Europe. We do not mean that the continental system in its latest version, Kelsenian and positivist, is superior to the common law system, only that the latter has often been inferior to Roman law. By “Roman law” we refer to the evolutionary, customary system based on the logical, exegetic, and doctrinal analysis of jurists of the Roman classical school. To put it another way, in the Anglo-Saxon common law system, past decisions are too binding, judges being often more influenced by the specific details of each case and by ostensible business activity than by the dispassionate, logical, and exegetic analysis which should be carried out based on essential legal principles. In short the Anglo-Saxon legal system depends excessively on
precedents, while the continental system, based on Roman law, rests on precedents, sound doctrine, and juridical theory.


The attempts to legally equate the monetary irregular-deposit contract with the loan or mutuum contract are particularly attractive to those who most benefit from banking practices (bankers and authorities). Considering that this is ultimately what a banker does when appropriating demand deposit funds, the
ideal legal solution for him is clearly to equate the irregular deposit contract with the loan contract. Moreover, a worn-out legal pretext has persistently been used to reinforce the argument for equating the two. Lax and superficial, it is as follows:
Since the irregular deposit contract consists of the deposit of fungible goods, the very essence of which implies the inevitable transfer of ownership of individual items deposited (because they are indistinguishable from one another), the
deposit and the loan are naturally one and the same, as both institutions entail the transfer of ownership.

In fact, even if ownership is transferred in both cases, the two contracts still differ radically concerning the availability of the item (an essential feature of the
contracts). Indeed, whereas in the loan contract full availability of the item is transferred along with ownership, the very essence of the irregular deposit contract demands that the purpose of safekeeping or custody predominate. Accordingly, although we might in theory consider that ownership is transferred, in practice such a transference is negligible, since the safekeeping or custody of the fungible good requires the constant availability of the tantundem to the depositor. Therefore, even if ownership were transferred in the same sense in
both institutions, an essential legal difference would still exist between them: the contrast in availability.
It may come as a surprise that the jurists who have chosen to equate the deposit contract with the mutuum or loan contract have overlooked such an obvious difference. The association between the contracts is so forced and the arguments so weak that it is amazing that a certain group of theorists have tried to defend them. However, their attempt has a historical, theoretical explanation: the depositum confessatum, a legal artifice which arose in the Middle Ages from attempts to avoid the canonical ban on interest. Although we have already
shown that the canonical prohibition on interest and the development of fractional-reserve banking shared very little direct connection, the depositum confessatum acted as a strong, indirect link between them. We already know that from the time of Roman law, if a depositary violated the essence of the
deposit contract, based on safekeeping, and appropriated deposits and was not able to immediately return the funds when the depositor demanded them, then the depositary was obliged to pay interest. Then, irrespective of any other foreseeable civil or criminal actions (the actio depositi and the actio furti),
as is logical, an additional suit was filed to obtain interest for late payment and the loss of availability to the depositor up to the point when the depositary returned his funds. Thus, it is easy to understand how convenient it was in the Middle Ages to disguise a loan as a deposit in order to make the payment of interest legal, legitimate and socially acceptable. For this reason, bankers started to systematically engage in operations in which the parties openly declared they were entering into a deposit contract and not a loan contract. However, as the Latin saying goes, excusatio non petita, accusatio manifesta (an unsolicited excuse is tantamount to a self-accusation). Indeed, with a true deposit it was not necessary to make any express declaration, and such a declaration, when made, only revealed an attempt to conceal a loan or mutuum contract. The purpose of disguising a loan as a deposit was to evade the strict canonical prohibitions on interest-bearing loans and to permit many true credit transactions highly necessary, both economically and socially.
The depositum confessatum clouded the decidedly clear legal boundaries between the irregular deposit contract and the loan or mutuum contract. Whatever a scholar’s stance on the canonical prohibition of usury, the depositum confessatum almost inevitably led to the “natural” identification of deposit
contracts with mutuum contracts. To a theorist who wished to discover and expose all violations of the canonical prohibition and each case of concealment of interest, anything that sounded like a “deposit” was sure to appear suspicious from the start, and the most obvious and efficient solution from this point of view was to automatically equate deposits with loans and condemn the payment of interest in all cases, regardless of the operation’s outer legal appearance. Paradoxically, the more “liberal” moralists did not stop at defending the legal
existence of deposits and the consequent legitimacy of interest for late payment; they went on to indicate that such deposits were ultimately loans, and hence the banker could use or invest the money. These authors sought not only to justify the payment of interest, but also to legitimize an institution that permitted the same acts of investment, or exchange of present goods for future goods, that the loan contract had traditionally made possible. Furthermore, this type of exchange was quite necessary to industry and trade. Throughout the Middle Ages, most jurists who commented on law texts held this position. As we saw in the last chapter, it was also the opinion of several members of the School of Salamanca, such as Luis de Molina, who believed the monetary irregular-deposit contract to be a “precarious loan” in which ownership of the money is transferred to the banker (which we have seen is admissible in the case of a deposit of fungible money), as well as full availability (which we know is impossible and contrary to the very essence of the deposit).
Moreover, as we have already seen, the Irish banker and economist Richard Cantillon, in the civil and criminal suits brought against him for misappropriating securities deposited with him as fungible goods through an irregular deposit contract during the wave of speculation generated in France by John Law’s system, tried to defend himself using the only doctrinal justification that had at that point been developed in favor of his position: that because the contract was for an “irregular” deposit (i.e., the securities were considered fungible goods), a complete transfer of both ownership and avail-
ability took place. Thus, he could legitimately appropriate the shares, sell them, and use them to speculate on the market without committing any crime nor harming his depositors.
The same legal line of argument used by Richard Cantillon’s defense had been developed by scholars with respect to the monetary irregular deposit (and not the irregular deposit of securities). Consequently, if it is considered legally appropriate and justified to equate the monetary deposit contract with the mutuum contract, the same would certainly be applicable, mutatis mutandis, to all other deposits of fungible goods; and in particular, to deposits of securities as goods indistinguishable from one another. Hence we must emphasize that any
possible doctrinal analysis against the legality of a complete transfer of ownership and availability in an irregular deposit of securities also ultimately constitutes a powerful case against the use of a fractional reserve in the monetary irregular deposit. The great Spanish mercantilist Joaquín Garrigues has recognized this fact. He states:
The reasoning thus far leads us to the affirmation that when a customer entrusts his shares to the bank he intends to contract a bank deposit; however, immediately after making this assertion, we become aware of another contract with a similar financial purpose. This contract also involves the entrusting to the bank of a fungible good (money) and cashier services are provided by the bank. This—defenders of the checking account will say—is another unique contract which is not called a loan nor a deposit in bank documents and which has the same legal effects as the securities current account; namely, the transference of ownership to the bank and the bank’s return of the tantundem.
Despite Garrigues’s forced and unconvincing attempt to persuade us that these two deposits are different, it is obvious that both contracts of irregular deposits of fungible goods (of money and of securities) are essentially identical, and therefore if we accept the transfer of full availability of the good in one case (the deposit of money), we must also accept it in the other. Consequently, there is no denying the legality of one (the deposit of securities) without denying the
legality of the other (the deposit of money). In conclusion, the legal arguments used by Cantillon in his defense were derived from theories regarding the monetary irregular-deposit contract, and if we consider them valid, then they also justify Cantillon’s obvious swindling of his customers and the host of irregular and fraudulent activities later performed in connection with irregular deposits of securities in the other countries, especially Spain. Catalonian bankers carried out such fraud well into the twentieth century, and Spanish scholars have correctly and unanimously recognized the dishonest, criminal nature of their behavior.


It is a remarkable fact that three of the most noted monetary theorists of the eighteenth and early nineteenth centuries were bankers: John Law, Richard Cantillon, and Henry Thornton. Their banks all failed. Cantillon alone escaped
relatively unscathed, not only because he stopped his risky speculation in time, but also (and most importantly) because of the large profits he fraudulently obtained by violating the obligation to safeguard his customers’ assets.

Indeed, Cantillon clearly violated the contract of irregular deposit, however in this case the deposit was not of money, but shares of stock in the Mississippi Trading Company, founded by John Law. Cantillon’s fraudulent scheme was as
follows: he loaned large amounts of money to his customers to allow them to buy shares in the company, on the condition that the stocks act as collateral and remain at Cantillon’s bank as an irregular deposit, in this case of fungible and indistinguishable shares. Later Cantillon, unbeknownst to his clients,
misappropriated the deposited securities, selling them when he thought their market price was high and keeping the money from the sale. Once the shares had lost practically all of their value, Cantillon bought them back for a fraction of their old price and restored deposits, securing a hefty profit.

Finally, he demanded repayment of the loans he had initially made to his clients, who were unable to return the money, since the collateral they had at the bank was worth close to nothing. These fraudulent operations led to multiple criminal
charges and civil suits against Cantillon, who, upon being arrested and briefly incarcerated, was forced to leave France in a hurry and flee to England.
Cantillon, in defense, put forward the same argument so often used throughout the Middle Ages by writers determined to confuse the irregular deposit with the loan. In fact, Cantillon tried to defend himself by claiming that the stocks
deposited with him as unnumbered fungible goods had not actually constituted a true deposit, but a loan implying the full transference of ownership and availability to the banker.
Thus, Cantillon considered his operations perfectly “legitimate.” Nevertheless, we know his legal argument was unsound and even though the deposit of securities was considered an irregular deposit of fungible goods, the obligation
to safeguard the shares and maintain continual possession of all of them remained. Therefore, when Cantillon sold the shares to the detriment of his customers he clearly committed the criminal act of misappropriation. F.A. Hayek explains Cantillon’s attempt to justify his fraudulent actions:
His point of view was, as he later explained, that the shares given to him, since their numbers had not been registered, were not a genuine deposit, but rather—as one would say today—a block deposit so that none of his customers had claim to specific securities. The firm actually made an extraordinary profit in this way, since it could buy back at reduced prices the shares sold at high prices, and meanwhile the capital, for which they were charging high interest, lost nothing at all but rather was saved and invested in pounds. When Cantillon, who had partially made these advances in his own name, asked for repayments of the loans from the speculators, who had suffered great losses, and finally took them to court, the latter demanded that the profits obtained by Cantillon and the firm from their shares be credited against these advances. They in turn took Cantillon to court in London and Paris, charging fraud and usury.
By presenting to the courts correspondence between Cantillon and the firm, they averred that the entire transaction was carried out under Cantillon’s immediate direction and that he therefore bore personal responsibility.
A perfect example in the twentieth century was the failure of the Bank of Barcelona and of other Catalonian banks that systematically accepted the irregular deposit of securities without keeping full custody of them. Instead, to attain a profit, they used them in all sorts of speculative operations to the detri-
ment of their true owners, just as Cantillon had done two hundred years earlier. Richard Cantillon was brutally murdered at his London home in 1734, after twelve years of litigation, two arrests, and the constant threat of imprisonment. Although the official version was that he was murdered and his body burned beyond recognition by an ex-cook who killed him to rob him, it is also plausible that one of his many creditors instigated the murder, or even, as suggested by A.E. Murphy, his most recent biographer, that Cantillon staged his own death to escape and to avoid more years of lawsuits and legal action against him.


The Bank of Amsterdam was a forerunner of the Bank of Stockholm (Riksbank), which began operating in 1656 and was divided into two departments: one responsible for the safekeeping of deposits (using a 100-percent reserve ratio) and modeled after the Bank of Amsterdam; and another devoted to loans. Although the departments supposedly functioned separately from one another, in practice they were separate only on paper, and the Bank of Stockholm soon abandoned the standards set by the Dutch bank. The Swedish authorities
nationalized it in 1668, making it the first government bank of the modern world. Not only did it violate the traditional principles which guided the Bank of Amsterdam, but it also initiated a new fraudulent and systematic practice: the
issuance of banknotes or deposit receipts for a sum higher than actual deposits received in cash. This is how banknotes were born, along with the lucrative practice of issuing them for a higher amount than the total of deposits. Over time, this activity would become the banking practice par excellence, especially
in the centuries that followed, during which it deceived scholars, who failed to realize that the issuance of banknotes had the same repercussions as artificial credit expansion and deposit creation, two practices which, as A.P. Usher has noted, had been at the core of the banking business from its origins.
The Bank of England was created in 1694 and was also patterned after the Bank of Amsterdam, due to the considerable influence Holland exerted on England following the accession of the House of Orange to the English throne. However, the bank was not constituted with the same legal guarantees of safekeeping as the Bank of Amsterdam. Instead, one of its main aims from the outset was to help finance public expenditures.
For this reason, although the Bank of England was intended to stop the commonplace, systematic abuses committed by private bankers and the government, in practice this goal was never achieved. In short, the Bank of England eventually failed, despite its privileged role as the government’s banker,
its monopoly on limited liability in England and its exclusive authorization to issue banknotes. As a result of its systematic neglect of the safekeeping obligation and its practice of granting loans and advances to the Treasury against the bank’s deposits, the Bank of England eventually suspended payments in 1797 after various colorful vicissitudes, including the South Sea Bubble.
Also in 1797, the same year the Bank of England was forbidden to return deposits in cash, it was declared that taxes and debts were to be paid in bills issued by the bank, and an attempt was made to limit advances and loans to the government. This was the dawn of the modern banking system, based on a fractional-reserve ratio and a central bank as lender of last resort.


The history of money and banking in eighteenth-century France is closely linked to the Scottish financier John Law and the “system” he concocted and put into practice there. Law persuaded the French regent, Philippe d’Orleans, that the
ideal bank was one that made use of the deposits it received, since this increased the amount of money in circulation and “stimulated” economic growth. Law’s system, like economic interventionism in general, arose from three different, though interconnected factors. First, disregard for traditional legal and moral principles, particularly the requirement for continual safekeeping of 100 percent of deposited money. Second, a reasoning error that appears to justify violating legal principles to attain seemingly beneficial goals quickly. Third, the fact that there will always be certain agents who view in proposed reforms an opportunity to make huge profits. The combination of these three factors allowed a political dreamer like Law to launch his “banking system” in France at the beginning of the eighteenth century. In fact, once the bank had earned people’s trust, it began to issue banknotes far exceeding deposits on hand and to extend loans against deposits.
The quantity of bills in circulation increased very rapidly, and as is logical, a significant artificial economic boom resulted. In 1718 the bank was nationalized (becoming the royal bank) and began churning out even more bills and granting more loans. This encouraged stock market speculation in general, and in
particular speculative buying and selling of shares of Law’s Compagnie de la Lousiane ou d’Occident or Mississippi Trading Company, aimed at fostering trade and advancing colonization of this French territory in America. By 1720 the absurd proportions of the financial bubble had become clear. Law tried desperately to stabilize the price of the company’s stock and the value of his bank’s paper money: the bank and trading company were merged, company stock was declared legal tender, coins lost part of their weight in an attempt to restore their relationship to bills, etc. However, all was in vain and the
inflationary bubble burst, bringing financial ruin not only to the bank but also to many French investors who had placed their trust in it and in the trading company. The losses were so heavy and the suffering so immense that for over a hundred years it was even considered a faux pas in France to utter the word “bank,” a term which for a time was synonymous with “fraud.” The ravages of inflation plagued France again a few decades later, as evidenced by the serious monetary chaos during the revolutionary period and the uncontrolled issuance of assignats at that time. All these phenomena made a permanent impression on the collective psyche of the French, who are still aware today of the grave dangers of paper money inflation and preserve the custom of storing considerable amounts of gold coins and ingots. In fact, France, together with India, is one of the countries whose people hold the largest stock of gold on a private basis.
All of the above notwithstanding, and in spite of his illfated banking experiment, John Law made some contributions to monetary theory. Although we cannot accept his inflationist and proto-Keynesian views, we must acknowledge, as Carl Menger did, that Law was the first to formulate a sound theory on the spontaneous, evolutionary origins of money.


A sign of the enormous prestige of the Bank of Amsterdam among scholars and intellectuals, as well as merchants, is the express mention David Hume makes of it in his essay Of Money. This essay first appeared, with others, in a book called
Political Discourses, published in Edinburgh in 1752. In it David Hume voices his opposition to paper currency and argues that the only solvent financial policy is that which forces banks to maintain a 100-percent reserve ratio, in accordance with traditional legal principles governing the irregular deposit of money. David Hume concludes that to endeavour artificially to encrease such a credit, can never be the interest of any trading nation; but must lay them under disadvantages, by encreasing money beyond its natural proportion to labour and commodities, and thereby heightening their price to the merchant manufacturer. And in this view, it must be allowed, that no bank could be more advantageous, than such a one as locked up all the money it received, and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce. A public bank, by this expedient, might cut off much of the dealings of private
bankers and money-jobbers; and though the state bore the charge of salaries to the directors and tellers of this bank (for, according to the preceding supposition, it would have no profit from its dealings), the national advantage, resulting from the low price of labour and the destruction of paper credit, would be a sufficient compensation.

Hume is not completely correct when he claims the bank would not earn a profit, since its safekeeping fees would be sufficient to cover operating costs, and it might even generate modest profits, as in fact the Bank of Amsterdam did. However his analysis is categorical and reveals that, in defending the creation of a public bank with these characteristics, he had in mind the success of the Bank of Amsterdam and the example it had already set for over one hundred years. Furthermore the third edition of his Essays and Treatises on Several Subjects,
published in four volumes in London and Edinburgh, 1753–1754, includes a note by Hume in reference to the phrase, “no bank could be more advantageous, than such a one as locked up all the money it received.” Footnote number four contains the following words: “This is the case with the Bank of Amsterdam.” It appears that Hume wrote this footnote with the intention of more clearly emphasizing his view that the Bank of Amsterdam was the ideal model for a bank.
Hume was not the very first to propose a 100-percent reserve requirement in banking. He was preceded by Jacob Vanderlint (1734) and especially by the director of the Royal mint, Joseph Harris, for whom banks were useful as long as they “issued no bills without an equivalent in real treasure.

Sir James Steuart offers us an important contemporary study of the Bank of Amsterdam’s operation in his treatise published in 1767 entitled, An Enquiry into the Principles of Political Oeconomy: Being an Essay on the Science of Domestic
Policy in Free Nations. In chapter 39 of volume 2, Steuart presents an analysis of the “circulation of coin through the Bank of Amsterdam.” He maintains that “every shilling written in the books of the bank is actually locked up, in coin, in the bank repositories.” Still, he states, Although, by the regulations of the bank, no coin can be issued to any person who demands it in consequence of his
credit in bank; yet I have not the least doubt, but that both the credit written in the books of the bank, and the cash in the repositories which balances it, may suffer alternate augmentations and diminutions, according to the greater or less demand for bank money.
At any rate, Steuart indicates that the bank’s activities “are conducted with the greatest secrecy,” in keeping with the traditional lack of openness in banking and especially significant in the case of the Bank of Amsterdam, whose statutes and operation demanded the maintenance of a continuous 100-percent reserve ratio. If Steuart is correct and this ratio was at times violated, it is logical that at the time the Bank of Amsterdam tried to hide the fact at all costs.

Although there are signs that at the end of the 1770s the Bank of Amsterdam began to violate the principles upon which it had been founded, in 1776 Adam Smith still affirmed in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, that The Bank of Amsterdam professes to lend out no part of
what is deposited with it, but, for every guilder for which it gives credit in its books, to keep in its repositories the value of a guilder either in money or bullion. That it keeps in its repositories all the money or bullion for which there
are receipts in force, for which it is at all times liable to be called upon, and which, in reality, is continually going from it and returning to it again, cannot well be doubted. . . . At Amsterdam no point of faith is better established than that for every guilder, circulated as bank money, there is a correspondant guilder in gold or silver to be found in the treasure of the bank.

Adam Smith goes on to say that the city itself guaranteed the operation of the Bank of Amsterdam as described above and that it was under the direction of four burgomasters who changed each year. Each burgomaster visited the vaults, compared their content in cash with deposit entries in the books and with great solemnity declared under oath that the two coincided. Adam Smith remarks, tongue-in-cheek, that “in that sober and religious country oaths are not yet disregarded.” He ends his commentary by adding that all of these practices were sufficient to guarantee the absolute safety of deposits in the bank, a fact which was demonstrated in various Dutch political revolutions. No political party was
ever able to accuse the prior of disloyalty in the management of the bank. By way of example, Adam Smith mentions that even in 1672, when the king of France marched into Utrecht and Holland was in danger of being conquered by a foreign power, the Bank of Amsterdam satisfied every last request for repayment of demand deposits. As we stated before, this acted as an even more impressive reinforcement of the public’s confidence in the absolute solvency of the bank.
As additional evidence that the Bank of Amsterdam maintained a 100-percent reserve ratio, Adam Smith offers the anecdote that some coins removed from the bank appeared to have been damaged in the building fire that struck the bank
soon after its creation in 1609, which shows those coins had been kept in the bank for over one hundred fifty years. Finally, Adam Smith, in strict keeping with the true legal nature of the irregular-deposit contract, which requires that it be the depositors who pay the bank, indicates that the bank’s income stemmed from safekeeping fees:
The City of Amsterdam derives a considerable revenue from the bank, besides what may be called the warehouse-rent above mentioned, each person, upon first opening an account with the bank, pays a fee of ten guilders, and for every new account three guilders three stivers; for every transfer two stivers; and if the transfer is for less than three hundred guilders, six stivers, in order to discourage the multiplicity of small transactions.
In addition, Adam Smith refers to other sources of income we have already mentioned, such as the exchange of money and the sale of gold and silver bars.
Unfortunately, in the 1780s the Bank of Amsterdam began to systematically violate the legal principles on which it had been founded, and evidence shows that from the time of the fourth Anglo-Dutch war, the reserve ratio decreased drastically, because the city of Amsterdam demanded the bank loan it a large portion of its deposits to cover growing public expenditures. Hence, deposits at that time amounted to twenty million florins, while there were only four million florins’ worth of precious metals in the vaults; which indicates that, not only did
the bank violate the essential principle of safekeeping on which it had been founded and its existence based for over one hundred seventy years, but the reserve ratio had been cut from 100 percent to less than 25 percent. This meant the final loss of the Bank of Amsterdam’s long-standing reputation: deposits
began to gradually decrease at that point, and in 1820 they had dwindled to less than one hundred forty thousand florins.
The Bank of Amsterdam was the last bank in history to maintain a 100-percent reserve ratio, and its disappearance marked the end of the last attempts to found banks upon general legal principles. The financial predominance of Amsterdam was replaced by the financial system of the United Kingdom, a much less stable and less solvent system based on the expansion of credit, deposits and paper currency.


The last serious attempt to establish a bank based on the general legal principles governing the monetary irregular deposit and to set up an efficient system of government control to adequately define and defend depositors’ property rights took place with the creation of the Municipal Bank of Amsterdam in 1609. It was founded after a period of great monetary chaos and fraudulent (fractional-reserve) private banking. Intended to put an end to this state of affairs and
restore order to financial relations, the Bank of Amsterdam began operating on January 31, 1609 and was called the Bank of Exchange.

The hallmark of the Bank of Amsterdam was its commitment, from the time of its creation, to the universal legal principles governing the monetary irregular deposit.
More specifically, it was founded upon the principle that the obligation of the depository bank in the monetary irregular-deposit contract consists of maintaining the constant availability of the tantundem in favor of the depositor; that is, maintaining at all times a 100-percent reserve ratio with respect to “demand” deposits. This measure was intended to ensure legitimate banking and prevent the abuses and bank failures which had historically occurred in all countries where the state had not only not bothered to prohibit and declare illegal the misappropriation of money on demand deposit in banks, but on the contrary, had usually ended up granting bankers all sorts of privileges and licenses to allow their fraudulent operations, in exchange for the opportunity
to take fiscal advantage of them.
For a very long time, over one hundred fifty years, the Bank of Amsterdam scrupulously fulfilled the commitment upon which it was founded. Evidence reflects that during the first years of its existence, between 1610 and 1616, both the bank’s deposits and its cash reserves came very close to one million florins. From 1619 to 1635, deposits amounted to nearly four million florins and cash reserves exceeded three million, five hundred thousand. After this slight imbalance, equilibrium was restored in 1645, when deposits equaled eleven million, two hundred eighty-eight thousand florins and cash reserves added up to eleven million, eight hundred thousand florins. Equilibrium and growth were more or less stable, and in the eighteenth century, between 1721 and 1722, the
bank’s deposits totaled twenty-eight million florins and its stock of cash reached nearly that amount, twenty-seven million. This great increase in the deposits of the Bank of Amsterdam stemmed, among other causes, from its role as a refuge for capital fleeing the crazy inflationist speculation that the system of John Law produced in France in the 1720s. This continued until 1772, in which both deposits and cash reserves totaled twenty-eight to twenty-nine million florins. As is evident, during this entire period, to all intents and purposes the Bank of Amsterdam maintained a 100-percent cash reserve. This allowed it, in all crises, to satisfy each and every request for cash withdrawal of deposited florins.
Such was true in 1672, when panic caused by the French threat gave rise to a massive withdrawal of money from Dutch banks, most of which were forced to suspend payments (as occurred with the Rotterdam and Middelburg banks). The
Bank of Amsterdam was the exception, and it logically had no trouble returning deposits. Increasing and lasting confidence in its soundness resulted, and the Bank of Amsterdam became an object of admiration for the civilized economic world of the time. Pierre Vilar indicates that in 1699 the French ambassador
wrote in a report to his king:
Of all the towns of the United Provinces, Amsterdam is without any doubt the foremost in greatness, wealth and the extent of her trade. There are few cities even in Europe to equal her in the two latter respects; her commerce stretches
over both halves of the globe, and her wealth is so great that during the war she supplied as much as fifty millions a year if not more.
In 1802, when, as we will now see, the Bank of Amsterdam started to become corrupt and violate the principles on which it was founded, the bank still enjoyed enormous prestige, to the point that the French consul in Amsterdam noted:
At the end of a maritime war which has kept the treasures of the mines pent up in the Spanish and Portuguese colonies, Europe is suddenly inundated with gold and silver in quantities far above what is needed, so that they would decline in value if they were put into circulation all at once.
In such an eventuality, the people of Amsterdam deposited the metal in ingots in the Bank, where it was kept for them at a very low cost, and they took it out a little at a time to send to different countries as the increase in the rate warrants it. This money, then, which if allowed to flood in too rapidly would have driven up the prices of everything exceedingly, to the great loss of all who live on fixed and limited incomes, was gradually distributed through many channels, giving life to industry and encouraging trade. The Bank of Amsterdam, then, did not act only according to the special interests of the traders of this city; but the whole of
Europe is in its debt for the greater stability of prices, equilibrium of exchange and a more constant ratio between the two metals of which coin is made; and if the bank is not reestablished, it could be said that the great system of the trade and political economy of the civilised world will be without an essential part of its machinery.
Therefore, we see that the Bank of Amsterdam did not try to attain disproportionate profits through the fraudulent use of deposits. Instead, in keeping with the dictates of Saravia de la Calle and others we have mentioned, it contented itself with the modest benefits derived from fees for safeguarding
deposits and with the small income obtained though the exchange of money and the sale of bars of stamped metal. Nevertheless, this income was more than sufficient to satisfy the bank’s operating and administration costs, to generate
some profit and to maintain an honest institution that fulfilled all of its commitments.
The great prestige of the Bank of Amsterdam is also evidenced by a reference to it found in the incorporation charter of the Spanish Banco de San Carlos in 1782. Although this bank, from its very inception, lacked the guarantees of the
Bank of Amsterdam, and it was created with the intention of using its deposits, authority, and clout to help finance the Treasury, it could not escape the immense influence of the Dutch bank. Thus, its article XLIV establishes that private individuals may hold deposits or equivalent funds in cash in the bank itself, and whoever wishes to make deposits shall be allowed to do so, either in
order to draw bills on the money or to withdraw it gradually, and in this way they will be exempt from having to make payments themselves, their bills being accepted as payable at the bank. In their first meeting, the stockholders
will determine the amount per thousand which merchants must pay the bank in relation to their deposits, as they do in Holland, and will establish all other provisions concerning the best dispatch of discounts and reductions.


In his book, Suma de tratos y contratos (Compilation of deals and contracts) (Seville 1571), Tomás de Mercado performs an analysis of the banking business very much in the same line as the studies by the preceding authors. He begins by correctly stating that depositors should pay bankers for the work of safeguarding their monetary deposits, concluding that it is a common, general rule among all bankers to be able to take wages from those who deposit money in their bank, a certain amount each year or for each thousand, because
bankers serve depositors and safeguard their assets.
Nevertheless, Tomás de Mercado ironically points out that bankers in Seville are so “generous” they charge nothing for guarding deposits: “those of this city, it is true, are so regal and noble they ask for and take no wage.” Tomás de Mercado
observes that these bankers have no need to charge anything, since the large amount of currency they obtain from deposits earns them substantial profits in personal business deals. We must emphasize that, in our opinion, Tomás de Mercado simply verifies a fact here and does not imply that he considers these actions in any way legitimate, as various modern authors (among others, Restituto Sierra Bravo and Francisco G. Camacho) appear to suggest. Quite the opposite is true.

From the standpoint of the purest Roman doctrine and the essential legal nature of the monetary irregular-deposit contract, Tomás de Mercado is the scholastic writer who most clearly demonstrates that the transfer of property in the irregular deposit does not imply a concomitant transfer of availability of the tantundem and therefore, for all practical purposes, there is no full transfer of property. He expresses himself quite well: “they [bankers] must understand that the money is not theirs, but belongs to others; and it is not fair that by using it, they cease to serve its owner.”
Tomás de Mercado adds that bankers should obey two fundamental principles. First: they should not strip the bank so bare they cannot then cover the drafts
they receive, because if they become unable to pay them because they have spent and invested the money in shady business and other deals, they certainly sin. . . . Second: they should not become involved in risky business deals, for they sin even if the deals turn out successfully, because the bankers chance not being able to fulfill their responsibilities and doing serious harm to those who have trusted them.
Though one could take these recommendations as an indication that Tomás de Mercado resigns to accept a certain fractional reserve, it is important to keep in mind that he is very emphatic in expressing his legal opinion that deposited
money does not ultimately belong to bankers but to depositors, and in stating, furthermore, that none of the bankers complies with his two recommendations:
however, since when business goes well, in affluent circumstances, it is very difficult to bridle greed, none of them takes heed of these warnings nor meets these conditions.
For this reason, he considers the regulations enacted by the Emperor Charles V in this respect to be very beneficial. They prohibited bankers from carrying out personal business deals and were aimed at eliminating the temptation to finance such dealings indefinitely with money obtained from depositors.
Also, at the end of chapter 4 of Suma de tratos y contratos, Tomás de Mercado states that the bankers of Seville hold deposits of money and precious metals belonging to merchants who traded with the New World, and that with such considerable deposits they “make great investments,” obtaining hefty profits. Here he does not openly condemn these practices, but we must remember that the passage in question is, again, more a description of a state of affairs than a judgment on its legitimacy. However, he does consider the issue of legitimacy. Tomás de Mercado concludes as well that bankers are also involved in exchanging and charging; bankers in this republic engage in an extremely wide range of activities, wider than the ocean, but sometimes they spread themselves too thin and all is lost.
The scholastics most misguided in their doctrinal treatment of the monetary irregular-deposit contract are Domingo de Soto and (especially) Luis de Molina and Juan de Lugo.
Indeed, these theorists allowed themselves to be influenced by the medieval tradition of the glossators, and especially by the doctrinal confusion resulting from the depositum confessatum. De Soto and especially Molina view the irregular deposit as a loan in which both the ownership and full availability of the tantundem are transferred to the banker. Therefore, they believe the practice
of loaning deposited funds to third parties is legitimate, as long as bankers act in a “prudent” manner. Domingo de Soto could be considered the first to maintain this thesis, though he did so very indirectly. In fact, in book six, topic eleven of his work, La justicia y el derecho (On justice and law) (1556), we read that bankers have the custom, it is said, of being liable for a greater amount of money than that deposited if a merchant makes his deposit in cash. I gave the moneychanger ten thousand; so he will be liable to me for twelve, perhaps fifteen; because having cash is very profitable for the moneychanger. Neither is any evil seen in it.
Another typical example of credit creation which Domingo de Soto appears to accept is a loan in the form of the discount of bills, financed using clients’ deposits.
Nevertheless, the Jesuit Luis de Molina is the scholar who has most clearly maintained an erroneous doctrine on the bank contract of monetary irregular deposit. Indeed, in Tratado sobre los cambios (Treatise on exchanges) (1597), he
upholds the medieval doctrine that the irregular deposit is a loan or mutuum contract in favor of the banker, a contract in which not only ownership is transferred, but full availability of the tantundem as well, which means the banker can legitimately use the money in his own interest, in the form of loans or in any other manner. Let us see how he presents his argument:
Because these bankers, like all the others, are true owners of the money deposited in their banks, and they differ greatly in this way from other depositaries . . . so they receive the money as a precarious loan and hence, at their own risk. Further on he indicates even more clearly that such a deposit is really a loan, as has been said, and ownership of the money deposited is transferred to the banker, so if it is lost it is lost to the banker.
This position conflicts with the doctrine Luis de Molina himself upholds in Tratado sobre los préstamos y la usura (Treatise on loans and usury), where he indicates that a term is an essential element of all loan contracts, and that if the duration of a loan has not been expressly stipulated and a date for its return
set, “it will be necessary to accept the decision of the judge as to the loan’s duration.” Moreover, Luis de Molina ignores all of the arguments presented in chapter 1 to demonstrate that the irregular deposit contract has nothing in common, in terms of legal nature and essence, with the loan or mutuum contract. Therefore, his doctrinal attempt to identify the two contracts with each other is a clear step backward, not only in relation to the much more coherent views of Saravia de la Calle and Martin de Azpilcueta, but also with respect to the true legal nature of the contract as it had already been developed by Roman juridical science. Therefore, it is strange that a mind as bright and penetrating as Luis de Molina did not realize the extreme danger of accepting the violation of the general legal principles governing the irregular deposit, and that he claimed,
it never occurs that all the depositors need their money in such a way that they do not leave many thousands of ducats deposited, with which the bankers can do business and either earn a profit or suffer a loss.
Molina does not recognize that in this way not only is the objective or essential purpose of the contract (custody and safekeeping) violated, but also that an incentive is provided for all sorts of illicit dealings and abuses which inexorably
generate an economic recession and bank failures. When the traditional legal principle requiring the continual safekeeping of the tantundem in favor of the depositor is not respected, there is no clear guide to avoiding bank failures. Furthermore, it is obvious that such vague, superficial suggestions as “try to act
prudently” and “do not become involved in risky business deals” are not sufficient help in preventing the very harmful economic and social effects of fractional-reserve banking. At any rate, Luis de Molina does at least bother to state, It is important to warn that [bankers] commit mortal sin if they use in their own business dealings so much of the money they hold on deposit that they are later unable, at the right time, to hand over the quantities the depositors request
or order to be paid against their deposited funds. . . . In addition, they commit mortal sin if they become involved in business dealings entailing a risk of not being able to return deposits. For example, if they send so much merchandise
overseas that, should the ship sink or be captured by pirates, they would not be able to repay deposits even after selling all of their assets. And they are not guilty of mortal sin only when the deal turns out poorly, but also when it turns out well. This is due to the chance they take of hurting depositors and the guaran- tors they themselves supply for the deposits.

We find this warning of Luis de Molina admirable, but at the same time we are astonished at his failure to recognize the profound contradiction that ultimately exists between his warning and his explicit acceptance of “prudent” fractional-
reserve banking. The fact is, regardless of how prudent bankers are, the only surefire way to avoid risks and ensure that deposits are permanently available to depositors is to maintain a 100-percent reserve ratio at all times.