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

62 Money, Bank Credit, and Economic Cyclesthan by the former. Usher states that: “the history of banks ofissue has, until lately, obscured the importance of due depositbanking in all its forms, whether primitive or modern.” In anironic reference to the undue importance given by economiststo the problems of banks of issue versus the older but equallyharmful activities of deposit banks, he concludes that:the demand for currency, and the theoretical interests createdby the problem, did much to foster misconceptions onthe relative importance of notes and deposits. Just as Frenchdiplomats “discovered” the Pyrenees in the diplomatic crisisof the eighteenth century, so banking theorists “discovered”deposits in the mid-nineteenth century. 41Again and again, Usher shows that the modern bankingsystem arose from fractional-reserve banking (itself the result offraud and government complicity, as Usher illustrates in detailvia the example of the late medieval Catalonian banking system),and not from banks of issue, which appeared much later.Usher points out that the first banks in twelfth-centuryGenoa made a clear distinction in their books between demanddeposits and “time” deposits, and recorded the latter as loansor mutuum contracts. 42 However, bankers later began graduallyto make self-interested use of demand deposits, giving riseto expansionary capabilities present in the banking system;more specifically, the power to create deposits and grant creditsout of nowhere. Barcelona’s Bank of Deposit is a case inpoint. Usher estimates that the bank’s cash reserves amountedto 29 percent of total deposits. This meant their capacity forcredit expansion was 3.3 times their cash reserves. 4341 Ibid., pp. 9 and 192.42 “In all these Genoese registers there is also a series of instruments inwhich the money received is explicitly described as a loan (mutuum).”Ibid., p. 63.43 Against these liabilities, the Bank of Deposit held reserves inspecie amounting to 29 percent of the total. Using the phraseologyof the present time, the bank was capable of extendingcredit in the ratio of 3.3 times the reserves on hand. (Ibid., p.181)