Henry Dunning Macleod on the History of Banking

Henry Dunning Macleod was a 19th century historian of banking in Great Britain, and this is a nice summary by him of the nature and history of banking:

“Here, again, great misconception prevails as to the meaning of the word banker and the nature of the business of banking. Gilbert says: ‘A banker is a dealer in capital; or, more properly, a dealer in money. He is an intermediate party between the borrower and the lender. He borrows of one party and lends to another; and the difference between the terms at which he borrows and those at which he lends forms the source of his profit.’ So a report of the House of Commons says: ‘The use of money, and that only, they regard as the province of a bank, whether of a private person or incorporation, or the banking department of the Bank of England.’ Notwithstanding the apparently high authority of these passages, which have misled so many unwary persons, these descriptions of the nature of the business of banking are entirely erroneous. In former times, there were many persons who acted as intermediaries between persons who wanted to lend and those who wanted to borrow. They were called ‘money scriveners.’ The father of John Milton was a money scrivener, but no one ever called a money scrivener a banker. At the present day, many firms of solicitors act as intermediaries between persons who wish to lend and others who wish to borrow. They may have some clients who wish to lend and other clients who want to borrow; and they act as agents between them. The first set of clients may entrust their money to the firm to lend to the second set, and the solicitors receive a commission on the sums which pass through their hands. But no one ever called a firm of solicitors who transact such business ‘bankers’; which shows that there is an essential distinction between the business of money scriveners and such a firm of solicitors and the business of ‘bankers.’ Solicitors who transact such agency business do not acquire any property in the money which passes through their hands. They receive it merely as a bailment or a depositum. They are only the custodians or the trustees of the money and it is only entrusted to their custody for the express purpose of being applied in a particular way. The actual property in the money passes directly from the lender to the borrower through the medium of the trustees or bailees, and if the latter appropriated the money in any way to their own purposes it would be a felony, and they would be liable to be punished for embezzlement. But the case of a banker is wholly different. When his customers pay in money to their account they cede the property in the money to the banker. The money placed with him is not a depositum or a bailment; it is a mutuum or creditum; it is a ‘loan’ or sale of the money directly to himself. The banker is not the bailee or trustee of the money, but its actual proprietor. He may trade with it or employ it in any way he pleases for his own profit or advantage. The banker buys the money from his customer, and in exchange for it he gives his customer a credit in his books, which is simply a right of action to demand back an equivalent amount of money from his banker at any time he pleases, and the customer may transfer this right of action to any one else he pleases, just like so much money.

When the client of a solicitor entrusts money to him, to lend to some one else, he retains the property in it until the arrangement with the borrower is completed; and then the property in the money is transferred directly from the lender to the borrower, without in any way vesting in the solicitor. But when a customer pays in money to his banker, the property in it instantly and, ipso facto, vests in the banker; and the customer has nothing but a right of action against the person of the banker to demand back an equivalent sum. So long as the money remains in the possession of the customer, it is a jus in rem; but when he has paid it into his account he has nothing but a jus in personam.

Galiani says (Delia Moneta, p. 325): ‘Banks began when men saw from experience that there was not sufficient money in specie for great commerce and great enterprises. The first banks were in the hands of private persons with whom persons deposited money; and from whom they received bills of credit (fedi di credito), and who were governed by the same rules as the public banks now are. And thus the Italians have been the fathers and the masters and the arbiters of commerce; so that in all Europe they have been the depositaries of money, and are called bankers.’ So Genovesi says (Delle deioni di Economia Civile, part II., ch. 5, § 5): ‘These monti (banks) were first administered with scrupulous fidelity, as were all human institutions made in the heat of virtue. From which it
came to pass that many placed their money on deposit, and as a security, received paper, which was called and is still called bills of credit. Thus private banks (banchi) were established among us, whose bills of credit acquired a great circulation, and increased the quantity of signs and the velocity of commerce.’ And this was always recognized as the essential feature of banking. Thus Marquardus says (Dejure Mercatorum, Lib. II., ch. 12, § 13): ‘And by “banking” is meant a certain species of trading in money, under the sanction of public authority, in which money is placed with bankers (who are also cashiers and depositaries of money) for the security of creditors and the convenience of debtors, in such a way that the property in the money passes to them; but always with the condition understood that any one who places his money with them may have it back whenever he pleases.’

A ‘banker’ is therefore a person who trades in the same way as the public banks did; they acquired the property in the money paid in; and in exchange for it they gave bills of credit; which circulated in commerce exactly like money and produced all the effects of money. And, moreover, when they bought or discounted bills of exchange, they did it exactly in the same way; they bought them by issuing their own credit, and not with money. And experience showed that they might multiply their bills of credit several times exceeding the quantity of money they held; and thus for all practical purposes multiply the quantity of money in circulation. This the essential business of a banker is to create and issue credit to circulate as money.” (Macleod, in Macleod, Horn and Townsend 1896. 199–201).

The essence of banking as an institution of capitalism has always been the taking of money as a mutuum, often with the client having the right to demand repayment of the bank’s debt to him on demand.

And it was not 17th century English goldsmiths who were the first European bankers, but banking in the sense defined above predated them by many centuries, and certainly existed not only in Italy in the Middle Ages, but also in the ancient Roman Republic and Empire too.

The business of banking as described above is not fraudulent. Thus the vision of banking as held by many Rothbardian libertarians goes against over 2000 years of capitalism.

The callable mutuum loan is – and always has been – a fundamental private business practice and, with the use of fractional reserves, the basis of banking.

This is why in the end Rothbardians – by their own criterion of being vehemently against restrictions on free, voluntary, non-fraudulent private exchanges/contracts – are actually anti-capitalist.

BIBLIOGRAPHY
Macleod, Henry Dunning, Horn, Antoine E. and John P. Townsend. 1896. A History of Banking in all the Leading Nations (vol. 2). Journal of Commerce and Commercial Bulletin, New York.