The Historical Beginnings of Banks: On Banks and Power

If the activity of bankers/banks, even in the earliest existence and formation of banking, is to store deposits and, based on the available funds from them, to grant loans, then it is appropriate to trace the contractual relations in this process. If a person has great wealth - measured in money/barter goods, then he is unlikely to store his huge amounts/quantities of it himself. Just as even in ancient times an agricultural ruler or merchant would not carry with him his stocks of grain, precious metals, precious objects and stones.

As early as the second millennium BC, ancient Babylonian temples began to play a role somewhat similar to that of banks. They collected donations and fees. Over time, they accumulated so much money that they began to grant loans to entrepreneurs and poor people in need of money . [1] Merchants also played a prototype of banks in the past, who granted loans to farmers and merchants who transported goods between cities. [2] It is believed that the idea of deposits has its roots in the emergence of gold at about the same time. At that time, people who owned large amounts of gold would leave it with friends to store when they were traveling. With the "institutionalization" of this practice and banking, fees began to be paid for the storage of wealth. Loans also began to be made. To document all this, agreements and conditions were written on clay tablets.

In addition to the historical beginning, it is important to pay attention to the purely legal characteristics of contractual relations with the operations carried out by bankers. The simplest and most basic functions are reduced to loan contracts and deposit contracts. Loan contracts can be of two types [3] - service loan and consumer loan.

The first type involves the lending of some thing free of charge to another person for a certain period of time; the ownership of the thing during the loan remains with the lender, and the user is obliged to return it after the term of use agreed upon by the parties. The second type involves the lending of some quantity of generically defined goods - when they are returned they are in the same quality and quantity as the ones initially provided. Since in this type of loan the borrowed goods can be mixed, then it should follow that this is a type of exchange of currently existing goods in exchange for future ones - that is why there is a reason to charge interest.

The second group of activities are deposits, which can be carried out and are accordingly based on contractual relations. In these operations, the right of possession of the deposited item is not transferred. Both items and generic goods can be deposited. It is considered that the deposit is in favor of the depositor, because if he wishes to be provided with the deposited item, this wish must be immediately satisfied. The two parties to the deposit contract can agree to charge interest on the costs. This deposit, which refers to fungible generic goods - money, fuel, grain - is incorrect, because in them what is deposited is mixed with a good of the same type - if this is fuel, it is stored with the remaining fuel from other deposits. This suggests that with this mixing, the ownership of this type of goods is transferred.

Incorrect cash deposit VS. cash loan

It is important to distinguish from the point of view of legal principles between an improper cash deposit and a cash loan. An improper cash deposit implies the storage and protection of the deposit in its full volume, the return of the money from the deposit under this contract is on demand and the depositor's obligation is to keep a 100% cash reserve at the disposal of the depositor. However, since, as mentioned above, goods are also deposited that are mixed during storage, in practice the ownership is transferred or, more precisely, it is not clearly demarcated. In the case of a cash loan, the main thing is the transfer of the availability of the goods at the time of the borrower - the contract requires the determination of the term for the return of the loan, as well as the interest that will be charged for repayment. Here, the borrower's obligation is to return the full amount of the loan by a certain date and to pay the interest agreed upon by the parties.

Saravia de la Calais [4] also distinguishes between the different operations that bankers perform – demand deposits and term deposits. In the former , customers entrust their money to the bankers without receiving interest , so that the money is safer and more easily accessible for making payments and to avoid the inconvenience and problems of counting. The second operation of the term deposit is a real loan or consumption contract , which is granted to the banker for a certain period and bears interest. The difference is that in demand deposits, the invested amount is kept in full, while in term deposits the banker can use it to grant credit, for example.

It is important to make this comparison because violating the principles of both types of contracts and playing with the terms of term deposits and demand contracts can lead to adverse effects not only in the form of bank failures, but also subsequent severe financial and economic crises.

Briefly about law , morality , the state and partial reserve

Credit is defined as belonging to all and also as the most important capital for the development of business. Banking is based on the trust of depositors, the honesty of bankers, the fact that bankers must always keep the money deposited on demand and that money borrowed by bankers for profit should be used as carefully and wisely as possible. According to the logic of simply explained banking, the money/funds and/or goods that a banker holds as a deposit can be granted as loans. Since human nature is obviously "weak", many bankers do not comply with the guaranteed full reserves on legally regulated obligations. It is increasingly happening that bankers use the funds from both types of deposits for personal use or use them in order to realize a greater profit.

The vicious circle of non-compliance with the rules is also expanded and encouraged by public authorities. The reason for this is that when you protect the wrongdoings of a “bad” banker, following the maxim “I to you, you to me”, you can use most of the money earned to lend to the authorities and finance the government. This vicious system is a significantly faster and easier way to finance than taxes. The period of centralization of banking was introduced during the Ptolemies in Egypt, when the first state bank was created. Additionally, guilds and associations of bankers were created to protect their interests, and as a bonus they received significant privileges from the rulers. Due to the outrages committed either by the bankers themselves or supported by the authorities, fractional reserve banking appeared in the Late Middle Ages. This process violated the basic principle of the full availability of input goods of the same type and quality , which should be available to the depositor.

Fractional reserve banking was the basis for credit expansion and was the result of fraud and government collusion—even going so far as to allow some rulers to establish government banks so that they could directly benefit from the profits of banking. Abbott Payson Usher [5] has called the emergence of fractional reserve banking the most significant event in the history of banking, rather than the emergence of the banks of issue in the second half of the 17th century. However, it should be noted that the issuance of unfunded notes and the use of demand deposits for loans have the same economic effects.

Fractional reserve banking leads to artificial credit expansion that is not supported by sufficient real savings. This creates a boom that leads to an economic crisis and an irreversible recession. Thus, the money supply includes a large amount of “bank money” or deposits created out of thin air by bankers who do not keep 100% of the money on demand. This leads to a period of artificial economic growth, followed by a recession.

Loan vs. credit ?

A loan is a contractual arrangement in which the borrower receives something of value at the time of receipt and agrees to repay the lender at a specified future date, usually with interest. [6] A loan is an estimate of the amount that can be obtained from the borrower, based on the borrower's financial history and ability to repay. A loan refers to the lending of money, property, or other assets in exchange for future repayment of the principal along with interest or other financial charges fixed as a period and at a specified rate. The terms of the loan are negotiated by each party to the transaction before the transfer of what is lent.

[1] Modern Banking Concept Started In Ancient Babylonian Temples, http://www.ancientpages.com/2016/03/07/modern-banking-concept-started-ancient-babylonian-temples/

[2] https://en.wikipedia.org/wiki/History_of_banking#Asia

[3] Money , Bank Credit, and Business Cycles, Jesus Huerta de Soto , p. 39

[4] Money , Bank Credit, and Business Cycles, p. 102

[5] Money , Bank Credit, and Business Cycles, p. 84

[6] https://www.investopedia.com/terms/c/credit.asp

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