“Unfortunately, with the passage of time and the fading from memory of previous banking abuses, the Venetian Senate eventually succumbed to the temptation of credit (borrowing money). Strapped for funds and not willing to face the voters with a tax increase, the politicians decided they would
authorize a new bank without restrictions against loans, have the bank create the money they needed, and then “borrow” it.
So, in 1619, the Banco del Giro was formed, which like its bankrupt predecessor, began immediately to create money out of nothing (not backed by coins) for the purpose of lending it to the government.”
“Throughout the 15th and 16th centuries, banks had been springing up all over Europe. Almost without exception, however, they followed the lucrative practice of lending money, which was not truly available for loan (it had no backing by coin). They created excess obligations against the reserves (depositors’ coins) and, as a result, every one of them failed. That is not to say that their owners and directors did not prosper. It merely means that their depositors lost all or a part of their assets entrusted to the banks for safekeeping.”
This is why the banking profession, in spite of its symbols of stability (impressive buildings, marble everywhere, thick steel vaults, and conservatively-dressed officers and staff) is viewed by many with deep suspicion? It is because banks—since they have been allowed to make loans without sufficient backing—continually come under the control of people with nothing but fraud on their minds. Fraud never seems to end in banking because it attracts criminals who perpetuate this endless fraud by controlling banking laws and minimizing fraud penalties. Many governments supported banking
“criminality” to gain access to huge bank loans involving money unbacked by coin.
“The Bank of Amsterdam: It wasn’t until the Bank of Amsterdam was formed in 1609 that we find a second example of sound banking practices, and the results were virtually the same as previously
experienced by the Banco della Piazza del Rialto. The bank only accepted deposits and steadfastly refused to make loans. Its income is 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. The (banking management) and the
City Council was required to take an annual oath swearing that the coin reserve of the bank was intact.” “The principles of honesty and restraint were not to be long-lived, however. The temptation of easy profit from money creation (paper money not backed by coins) was simply too great.
As early as 1657, individuals had been permitted to overdraw their account which means, of course, that the bank created new money (not backed by coins) out of their debt. In later years enormous loans were made to the Dutch East Indies Company. The truth finally became known to the public in January of 1790, and (depositors demanded a return of their coin deposits) from that date forward. Ten months later the bank was declared insolvent and was taken over by the City of Amsterdam.”
When depositors lose trust in a bank where they have their coin deposits, they frequently demand the return of their deposits and this is referred to as “a run on the bank.”
“The Bank of Hamburg: The third and last experience with honest banking occurred in Germany with the Bank of Hamburg. For over two centuries it faithfully adhered to the principle of safe deposit (its paper currency was always fully backed by depositors’ coins). So scrupulous was its administration that, when Napoleon took possession of the bank in 1813, he found 7.5 million marks in silver held against liabilities (paper money) of 7.4 million marks. That was more than was actually needed. Most of the bank’s treasure that Napoleon hauled away was restored a few years later by the French government in the form of securities (promises to pay). It is not clear if the securities were of much value but, even if they were, they were not the same as silver. Because of foreign invasion, the bank’s currency was no longer fully convertible into coin as receipt money (paper money fully backed by depositors’ coins). It was now paper money only partially backed by depositors’ coins, and the self-destruct mechanism had been set in motion. The bank lasted other 55-years until 1871 when it was ordered to liquidate all of its accounts.
To be continued…