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

116 Money, Bank Credit, and Economic Cyclesauthorities and confusion arising from the depositum confessatum,a product of the canonical ban on interest). As is logical,the lack of a legal basis for such a widespread practice soonprompted bankers and theorists alike to search for a fittinglegal justification. Moreover, this urge was reinforced by thefact that, on almost all occasions, the government or publicauthorities ended up being the main beneficiary of fraudulentbanking practices. Therefore it is not surprising, given the traditionalsymbiosis between political authorities and the intelligentsia,that the latter was driven by the former to search forlegal grounds to support the practices it permitted andencouraged. 1Finding adequate legal grounds was essential to the survivalof the whole network of vested interests which fractional-reservebanking generates. It was clear to any educatedperson that these practices should be based on somethingsounder than a mere de facto situation. It is not enough to realizeand affirm, as Shepard B. Clough does, thatIn fact, [goldsmiths] even lent money given them for safekeepingon the theory and experience that they needed tohave on hand only enough to meet the expected, currentdemand of depositors. This practice led them, at least by theseventeenth century, to the issuing of “promises to pay,”that is, “goldsmiths’ notes,” which, like modern banknotes,circulated from person to person. These “promises to pay,”which could be paid by using the deposits of customers,came actually to exceed the amount of money on deposit.When this happened credit had been actually created byissuing paper—a very major discovery. 2Nevertheless, no matter how “major” one considers the“discovery” that it is possible to make fraudulent use ofdepositors’ money or issue deposit receipts for a greater1 See Bertrand de Jouvenel, “The European Intellectuals and Capitalism,”in Friedrich A. Hayek, ed., Capitalism and the Historians (Chicago:University of Chicago Press, 1954).2 Shepard B. Clough, The Economic Development of Western Civilization (NewYork: McGraw-Hill, 1959), p. 109; italics added. See also chapter 4, n.7.