Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

50 Money, Bank Credit, and Economic Cyclesbankers operating, against general legal principles, with a fractional-reserveratio bring about credit expansion 19 unbackedby real savings, leading to artificial, inflationary economicbooms, which finally revert in the shape of crises and economicrecessions, in which banks inexorably tend to fail.Raymond Bogaert has mentioned the periodic crisesaffecting banking in ancient Greece, specifically the economicand financial recessions of 377–376 B.C. and 371 B.C., duringwhich the banks of Timodemus, Sosynomus and Aristolochus(among others) failed. Though these recessions were triggeredby the attack of Sparta and the victory of Thebes, theyemerged following a clear process of inflationary expansion inwhich fraudulent banks played a central part. 20 Records alsoreflect the serious banking crisis which took place in Ephesusfollowing the revolt against Mithridates. This crisis motivatedauthorities to grant the banking industry its first express, historically-documentedprivilege, which established a ten-yeardeferment on the return of deposits. 21In any case, the bankers’ fraudulent activity was extremely“profitable” as long as it was not discovered and banks didnot fail. We know, for example, that the income of Passioreached 100 minas, or a talent and two-thirds. Professor TrigoPortela has estimated that this figure in kilograms of goldwould be equivalent today to almost two million dollars ayear. This does not seem an extremely large amount, though itwas really quite spectacular, considering most people lived atmere subsistence level, ate only once a day and had a diet ofcereals and vegetables. Upon his death, Passio’s fortune19 The money supply at Athens can thus be seen to consist ofbank liabilities (“deposits”) and cash in circulation. Theamount of increase in the bank portion of this money supplywill depend on the volume and velocity of bank loans, thepercentage of these loan funds immediately or ultimatelyredeposited in the trapezai, and the time period and volatilityof deposits. (Cohen, Athenian Economy and Society, p. 13)20 Bogaert, Banques et banquiers dans les cités grecques, pp. 391–93.21 Ibid., p. 391.