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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 61Barcelona’s Bank of Deposit, or Taula de Canvi, and others wewill consider later). 39THE REVIVAL OF DEPOSIT BANKING IN MEDITERRANEAN EUROPEAbbott Payson Usher, in his monumental work, The EarlyHistory of Deposit Banking in Mediterranean Europe, 40 studies thegradual emergence of fractional-reserve banking during thelate Middle ages, a process founded on the violation of thisgeneral legal principle: full availability of the tantundem mustbe preserved in favor of the depositor. According to Usher, itis not until the thirteenth century that some private bankersbegin to use the money of their depositors to their own advantage,giving rise to fractional-reserve banking and the opportunitiesfor credit expansion it entails. Moreover, and contraryto a widely-held opinion, Usher believes this to be the mostsignificant event in the history of banking, rather than theappearance of banks of issue (which in any case did not occuruntil much later, in the late seventeenth century). As we willsee in chapter 4, although exactly the same economic effectsresult from the issuance of bank notes without financial backingand the loaning of funds from demand deposits, bankingwas historically shaped more by the latter of these practices39 Islamic law also banned bankers’ personal use of irregular depositsthroughout the medieval period, especially on the Iberian Peninsula.See, for instance, the Compendio de derecho islámico (Risála, Fí-l-Fiqh), bythe tenth-century Hispano-Arabic jurist Ibn Abí Zayd, called Al-Qayrawání, published with the support of Jesús Riosalido (Madrid: EditorialTrotta, 1993). On p. 130 we find the following statement of a juridicalprinciple: “he who uses a money deposit to do business commits areprehensible act, but if he uses his own money, he may keep the profit.”(See also pp. 214–15, where it is stipulated that, in the case of a true loanor mutuum, the lender may not withdraw the money at will, but only atthe end of the agreed-upon term; the Islamic legal concept of moneydeposit closely parallels that of the Roman irregular deposit.)40 Abbott Payson Usher taught economics at Harvard University andauthored the celebrated work, The Early History of Deposit Banking inMediterranean Europe (Cambridge, Mass.: Harvard University Press,1943).