Saturday, February 13, 2010

The last honest bank in history

The Bank of Amsterdam was founded in 1609 as a deposit bank. It was highly unusual among banks because it was a deposit bank that only engaged in deposit banking. It refused to make loans. From G. Edward Griffin's The Creature From Jekyll Island: A Second Look At the Federal Reserve:
Its income was derived solely from service fees. All payments in and around Amsterdam soon came to be made in paper currency issued by the bank and, in fact, that currency carried a premium over coin itself. [pp. 172-173; emphasis added]
Quoting from John Kenneth Galbraith's Money: Whence It Came, Where It Went, Griffin writes:
For a century after its founding it functioned usefully and with notably strict rectitude. Deposits were deposits, and initially the metal remained in storage for the man who owned it until he transferred it to another. None was loaned out. [Creature, p. 173]
According to Jesus Huerta de Soto in Money, Bank Credit, and Economic Cycles [Pdf], the bank was founded on the principle that it had a contract with the depositor that required it to maintain at all times
a 100-percent reserve ratio with respect to “demand” deposits. This measure was intended to ensure legitimate banking and prevent the abuses and bank failures which had historically occurred in all countries where the state had not only not bothered to prohibit and declare illegal the misappropriation of money on demand deposit in banks, but on the contrary, had usually ended up granting bankers all sorts of privileges and licenses to allow their fraudulent operations, in exchange for the opportunity to take fiscal advantage of them. [p. 98; emphasis added]
De Soto quotes David Hume as saying that
no bank could be more advantageous, than such a one as locked up all the money it received, and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce. [p. 102]
In Wealth of Nations, Adam Smith also had high praise for the bank:
The Bank of Amsterdam professes to lend out no part of what is deposited with it, but, for every guilder for which it gives credit in its books, to keep in its repositories the value of a guilder either in money or bullion. That it keeps in its repositories all the money or bullion for which there are receipts in force, for which it is at all times liable to be called upon, and which, in reality, is continually going from it and returning to it again, cannot well be doubted. . . . At Amsterdam no point of faith is better established than that for every guilder, circulated as bank money, there is a correspondant guilder in gold or silver to be found in the treasure of the bank. [p. 104, De Soto]
In the 1780s, as demanded by the city of Amsterdam, the bank began to loan out a large part of its deposits to cover growing government spending.
Hence, deposits at that time amounted to twenty million florins, while there were only four million florins’ worth of precious metals in the vaults; which indicates that, not only did the bank violate the essential principle of safekeeping on which it had been founded and its existence based for over one hundred seventy years, but the reserve ratio had been cut from 100 percent to less than 25 percent. This meant the final loss of the Bank of Amsterdam’s long-standing reputation: deposits began to gradually decrease at that point, and in 1820 they had dwindled to less than one hundred forty thousand florins. The Bank of Amsterdam was the last bank in history to maintain a 100-percent reserve ratio, and its disappearance marked the end of the last attempts to found banks upon general legal principles. [p. 106, De Soto; emphasis added]

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