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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 107separately from one another, in practice they were separateonly on paper, and the Bank of Stockholm soon abandoned thestandards set by the Dutch bank. 114 The Swedish authoritiesnationalized it in 1668, making it the first government bank ofthe modern world. 115 Not only did it violate the traditionalprinciples which guided the Bank of Amsterdam, but it alsoinitiated a new fraudulent and systematic practice: theissuance of banknotes or deposit receipts for a sum higher thanactual deposits received in cash. This is how banknotes wereborn, along with the lucrative practice of issuing them for ahigher amount than the total of deposits. Over time, this activitywould become the banking practice par excellence, especiallyin the centuries that followed, during which it deceived scholars,who failed to realize that the issuance of banknotes had thesame repercussions as artificial credit expansion and depositcreation, two practices which, as A.P. Usher has noted, hadbeen at the core of the banking business from its origins.The Bank of England was created in 1694 and was also patternedafter the Bank of Amsterdam, due to the considerableinfluence Holland exerted on England following the accessionof the House of Orange to the English throne. However, thebank was not constituted with the same legal guarantees ofsafekeeping as the Bank of Amsterdam. Instead, one of its mainaims from the outset was to help finance public expenditures.For this reason, although the Bank of England was intended tostop the commonplace, systematic abuses committed by privatebankers and the government, 116 in practice this goal was114 In this sense, as Kindleberger perceptively points out in A FinancialHistory of Western Europe, pp. 52–53, the Riksbank’s system of organizationwas a precursor to the structure which two centuries later the PeelAct (Bank Charter Act) of 1844 assigned the Bank of England.115 In celebration of the tercentenary of the Bank of Stockholm in 1968,an endowment was made to fund a yearly Nobel Prize in economics.116 For instance, in 1640, Charles I, echoing the policies pursued in Spaina hundred years earlier by his namesake the emperor Charles V, seizedthe gold and valuables deposited for safekeeping in the Tower of Londonand in the process completely ruined the reputation of the mint as a safeplace for valuables. Thirty-two years later, Charles II also failed in hisduty, causing the royal treasury to suspend payments and precipitating