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The Origins of Fraudulent Banking and Government Finance: Ancient Greece



August 03, 2009 – Comments (6)

I would like to continue to share passages from Jesus Huerta De Soto's Money, Bank Credit, and Economic Cycles.  The purpose for this is as follows:

1. To allow CAPS bloggers an easy reference point to cite historical information when involved in debates about fractional reserve banking, or to make certain points more clear through reference.

2. To share historical information with the many inquisitive readers at CAPS who have clearly exhibited a demand for said information.

3.  To refute any and all reasons for maintaining the status quo in fractional reserve banking. 

Fractional Reserve Banking is not:

1.  A new feature of the modern economy.

2.  Required to have a functioning and dynamic modern economy.

3.  A respectable profession.

4.  The same as loan banking.

5.  Independent of government politicking nor has it ever been successfully regulated by government.

6.  Any different today than from the hundreds of different attempts at fractional reserve banking that have tried and failed, losing wealth for millions of customers, throughout history.

7.  Any more stable today than it has been.  Research bank failures in America by year if you doubt this statement.

In the reading below you will find the first historical examples of fractional reserve banking and the Greek government's attempts to deal with these misappropriations.  In following posts, we will trace history all the way up to present day.   Then we will dismiss the ex post facto justifications presented by the intelligentsia and spoon fed to state educated children for the last 150 years.

I started this series with the last honest bank: The Bank of Amsterdam from 1609-1780, which operated with at or very near 100% cash reserves for the entire time and was the most respected bank in world history.  Sadly, even they eventually fell prey to the lure of misappropriating the fungible good.  There was a purpose to this as well.  So many in the CAPS community want an example of how it worked rather than an understanding of the theoretical constructs that make it possible.  We give them the examples and save the logic and reason for the rest of us.

Why am I permitted to post De Soto's work?  Former president of the Ludwig Von Mises Institute Lew Rockwell owns the copyright for all works submitted to LvMI.  Subsequently he releases all the information for free.  The genius here is that it prevents others from copyrighting and attempting to sell or subvert the material.  It is all of ours for free.  On a side note, this has made Lew Rockwell among the most influential men in the world.

The entire book is available for free on pdf here.  Don't forget to read the Notes section that I will post in the first comment. De Soto's notes are sometimes better than the material.

I hope you enjoy the read.

David in Qatar

In ancient Greece temples acted as banks, loaning money to individuals and monarchs. For religious reasons temples ere considered inviolable and became a relatively safe refuge for money. In addition, they had their own militias to defend them and their wealth inspired confidence in depositors.
From a financial standpoint the following were among the most important Greek temples: Apollo in Delphi, Artemis n Ephesus, and Hera in Samos.


Fortunately certain documentary sources on banking in reece are available to us. The first and perhaps most important s Trapezitica, (4) written by Isocrates around the year 393 B.C. (5) It is a forensic speech in which Isocrates defends the interests of the son of a favorite of Satyrus, king of Bosphorus. The son accuses Passio, an Athenian banker, of misappropriating a deposit of money entrusted to him. Passio was an exslave of other bankers (Antisthenes and Archetratos), whose
trust he had obtained and whose success he even surpassed, for which he was awarded Athenian citizenship. Isocrates’s forensic speech describes an attempt by Passio to appropriate deposits entrusted to his bank by taking advantage of his depositor’s difficulties, for which he did not hesitate to deceive, forge, and steal contracts, bribe, etc. In any case, this speech is so important to our topic that it is worth our effort to consider some of its passages in detail.

Isocrates begins his arguments by pointing out how hazardous it is to sue a banker, because

"deals with bankers are made without witnesses and the injured parties must put themselves in jeopardy before such people, who have many friends, handle large amounts of money and appear trustworthy due to their profession." (6)

It is interesting to consider the use bankers have always made of all of their social influence and power (which is enormous, given the number and status of figures receiving loans from them or owing them favors) to defend their privileges and continue their fraudulent activity. (7)

Isocrates explains that his client, who was planning a trip, deposited a very large amount of money in Passio’s bank. After a series of adventures, when Isocrates’s client went to withdraw his money, the banker claimed he “was without funds at the moment and could not return it.” However, the banker, instead of admitting his situation, publicly denied the existence of any deposit or debt in favor of Isocrates’s client. When the client, greatly surprised by the banker’s behavior, again claimed payment from Passio, he said to the banker,

"after covering his head, cried and said he had been forced by economic difficulties to deny my deposit but would soon try to return the money to me; he asked me to take pity on him and to keep his poor situation a secret so it would not be discovered he had committed fraud." (8)

It is therefore clear that in Greek banking, as Isocrates indicates iin his speech, bankers who received money for safekeeping and custody were obliged to safeguard it by keeping it available to their clients. For this reason, it was considered fraud to employ that money for their own uses. Furthermore,
the attempt to keep this type of fraud a secret so people would conserve their trust in bankers and the latter could continue their fraudulent activity is very significant. Also, we may deduce from Isocrates’s speech that for Passio this was not an isolated case of fraud, an attempt to appropriate the money of a client under favorable circumstances, but that he had difficulty returning the money because he had not maintained a 100-percent reserve ratio and had used the deposited money
in private business deals, and he was left with no other “escape” than to publicly deny the initial existence of the deposit.

Isocrates continues his speech with more words from his client, who states:

"Since I thought he regretted the incident, I compromised and told him to find a way to return my money while saving face himself. Three days later we met and both promised to keep what had happened a secret; (he broke his promise, as you will find later in my speech). He agreed to sail with ne to Pontus and to return the gold to me there, in order to cancel the contract as far from this city as possible; that way, no one from here would find out the details of the cancellation, and upon sailing back, he could say whatever he chose."

Nevertheless, Passio denies this agreement, causes the disappearance of the slaves who had been witnesses to it and forges and steals the documents necessary to try to demonstrate that the client had a debt with him instead of a deposit. given the secrecy in which bankers performed most of their activities, and the secret nature of most deposits, (9) witnesses ere not used, and Isocrates was forced to present indirect witnesses who knew the depositor had taken a large amount of money and had used Passio’s bank. In addition, the witnesses knew that at the time the deposit was made the depositor had changed more than one thousand staters into gold. Furthermore, Isocrates claims that the point most likely to convince the judges of the deposit’s existence and of the fact that Passio tried to appropriate it was that Passio always refused to

"turn over the slave who knew of the deposit, for interrogation under torture. What stronger evidence exists in contracts with bankers? We do not use witnesses with them." (10)

Though we have no documentary evidence of the trial’s verdict, it is certain that Passio was either convicted or arrived at a compromise with his accuser. In any case, it appears that afterward he behaved properly and again earned the trust of the city. His house was inherited by an old slave of his, Phormio, who successfully took over his business.

More interesting information on the activity of bankers in Greece comes from a forensic speech written by Demosthenes in favor of Phormio. Demosthenes indicates that, at the time of Passio’s death, Passio had given fifty talents in loans still outstanding, and of that amount, “eleven talents came from bank deposits.” Though it is unclear whether these were time or demand deposits, Demosthenes adds that the banker’s profits were “insecure and came from the money of others.” Demosthenes
concludes that “among men who work with money, it is admirable for a person known as a hard worker to also be honest,” because “credit belongs to everyone and is the most important business capital.” In short, banking was based on depositors’ trust, bankers’ honesty, on the fact that bankers should always keep available to depositors money placed in demand deposits, and on the fact that money loaned to bankers for profit should be used as prudently and sensibly as possible. In any case, there are many indications that Greek bankers did not always follow these guidelines, and that they used for themselves money on demand deposit, as described by Isocrates in Trapezitica and as Demosthenes reports of other bankers (who went bankrupt as the result of this type of activity) in his speech in favor of Phormio. This is true of Aristolochus, who owned a field “he bought while owing money to many people,” as well as of Sosynomus, Timodemus, and others who went bankrupt, and “when it was necessary to pay those to whom they owed money, they all suspended payments and surrendered their assets to creditors.” (11)

Demosthenes wrote other speeches providing important information on banking in Greece. For example, in “Against Olympiodorus, for Damages,” (12) he expressly states that a certain

"some money on demand deposit in the bank of Heraclides, and the money was spent on the burial and other ritual ceremonies and on the building of the funerary monument."

In this case, the deceased made a demand deposit which was withdrawn by his heirs as soon as he died, to cover the costs of burial. Still more information on banking practices is offered in the speech “Against Timothy, for a Debt,” in which Demosthenes affirms that

"bankers have the custom of making entries for the amounts they hand over, for the purpose of these funds, and for deposits people make, so that the amounts given out and those deposited are recorded for use when balancing the books." (13)

This speech, delivered in 362 B.C., is the first to document that bankers made book entries of their clients’ deposits and withdrawals of money. (14) Demosthenes also explains how checking accounts worked. In this type of account, banks jade payments to third parties, following depositors’ instructions. (15) As legal evidence in this specific case, Demosthenes

"adduced the bank books, demanded copies be made, and after showing them to Phrasierides, I allowed him to inspect the books and make note of the amount owed by this individual." (16)

Finally, Demosthenes finishes his speech by expressing his concern at how common bank failures were and the people’s great indignation against bankers who went bankrupt. Demosthenes mistakenly attributes bank failures to men who

"in difficult situations request loans and believe that credit should be granted them based on their reputation; however, once they recover economically, they do not repay the money, but instead try to defraud." (17)

We must interpret Demosthenes’s comment within the context of the legal speech in which he presents his arguments. The purpose of the speech was precisely to sue Timothy for not returning a bank loan. It would be asking too much to expect Demosthenes to have mentioned that most bank failures occurred because bankers violated their obligation to safeguard demand deposits, and they used the money for themselves and put it into private business deals up to the point when, for some reason, the public lost trust in them and tried to withdraw their deposits, finding with great indignation that the money was not available.

On various occasions research has suggested Greek bankers usually knew they should maintain a 100-percent reserve ratio on demand deposits. This would explain the lack of evidence of interest payments on these deposits, as well as the proven fact that in Athens banks were usually not considered sources of credit. (18) Clients made deposits for reasons of safety and expected bankers to provide custody and safekeeping, along with the additional benefits of easily-documented cashier services and payments to third parties. Nevertheless, the fact that these were the basic principles of legitimate banking did not prevent a large group of bankers from yielding to the temptation to (quite profitably) appropriate deposits, a fraudulent activity which was relatively safe as long as people retained their trust in bankers, but in the long run it was destined to end in bankruptcy. Moreover, as we will illustrate with various historical examples, networks of fraudulent bankers operating, against general legal principles, with a fractional-reserve ratio bring about credit expansion (19) unbacked by real savings, leading to artificial, inflationary economic booms, which finally revert in the shape of crises and economic recessions, in which banks inexorably tend to fail.

Raymond Bogaert has mentioned the periodic crises affecting banking in ancient Greece, specifically the economic and financial recessions of 377–376 B.C. and 371 B.C., during which the banks of Timodemus, Sosynomus and Aristolochus (among others) failed. Though these recessions were triggered by the attack of Sparta and the victory of Thebes, they emerged following a clear process of inflationary expansion in which fraudulent banks played a central part. (20) Records also reflect the serious banking crisis which took place in Ephesus following the revolt against Mithridates. This crisis motivated authorities to grant the banking industry its first express, historically-documented privilege, which established a ten-year deferment on the return of deposits. (21)

In any case, the bankers’ fraudulent activity was extremely “profitable” as long as it was not discovered and banks did not fail. We know, for example, that the income of Passio reached 100 minas, or a talent and two-thirds. Professor Trigo Portela has estimated that this figure in kilograms of gold would be equivalent today to almost two million dollars a year. This does not seem an extremely large amount, though it was really quite spectacular, considering most people lived at mere subsistence level, ate only once a day and had a diet of cereals and vegetables. Upon his death, Passio’s fortune amounted to sixty talents; given a constant value for gold, this would add up to nearly forty-four million dollars. (22)

6 Comments – Post Your Own

#1) On August 03, 2009 at 10:08 AM, chk999 (99.96) wrote:

What are you going to replace fractional reserve banking with?

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#2) On August 03, 2009 at 10:09 AM, whereaminow (< 20) wrote:


(4) Raymond de Roover points out that the current term banker originated n Florence, where bankers were called either banchieri or tavolieri, because they worked sitting behind a bench (banco) or table (tavola). The same logic was behind terminology used in ancient Greece as well, where bankers were called trapezitei because they worked at a trapeza, or table. This is why Isocrates’s speech “On a Matter of Banking” is traditionally known as Trapezitica. See Raymond de Roover, The Rise and Decline of the Medici Bank, 1397–1494 (Cambridge, Mass.: Harvard University Press, 1963), p. 15. The great Diego de Covarrubias y Leyva, for his part, indicates that

"the remuneration paid to money changers for the exchange of money was called collybus by the Greeks, and therefore money changers were called collybists. They were also called nummularii and argentarii, as well as trapezitei, mensularii or bankers, because apart from changing money, they carried out a much more profitable business activity: they received money for safekeeping and loaned at interest their own money and that of others."

See chapter 7 of Veterum collatio numismatum, published in Omnium operum in Salamanca in 1577.

(5) Isocrates was one of the ancient macróbioi, and he lived to be almost 100 years old (436–338 B.C.). His life began during the last years of peaceful Athenian dominance over Persia and lasted through the Peloponnesian War, Spartan and Theban supremacy and the Macedonian expansion, which ended in the battle of Chaeronea (Chaironeia), in which Philip II defeated the Delian League the same year Isocrates died. Isocrates’s father, Theodorus, was a middle-class citizen whose flute factory had earned him considerable wealth, permitting him to give his children an excellent education. Isocrates’s direct teachers appear to have included Theramines, Gorgias, and especally Socrates (there is a passage in Phaedrus where Plato, using Socrates as a mouthpiece, praises the young Isocrates, apparently ironically, predicting his great future). Isocrates was a logographer; that is, he wrote legal speeches for others (people suing or defending their rights) and later he opened a school of rhetoric in Athens. For information on Isocrates, see Juan Manuel Guzmán Hermida’s
“Introducción General” to Discursos (Madrid: Biblioteca Clásica Gredos, 1979), vol. 1, pp. 7–43.

(6) Isocrates, “Sobre un asunto bancario,” in Discursos I, p. 112.

(7) More than 2200 years after Isocrates, the Pennsylvanian senator Condy Raguet also recognized the great power of bankers and their use of it to intimidate their enemies and to in any way possible discourage depositors from withdrawing their deposits and hinder these withdrawals, with the vain hope, among others, of avoiding crises. Condy Raguet concluded that the pressure was almost unbearable and that

"an independent man, who was neither a stockholder or a debtor who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society."

See the letter from Raguet to Ricardo dated April 18, 1821, published in David Ricardo, Minor Papers on the Currency Question 1805–1823, Jacob Hollander, ed. (Baltimore: The Johns Hopkins University Press, 1932), pp. 199–201. This same idea had already been expressed almost three centuries earlier by Saravia de la Calle, who, indicating obstacles created by bankers to keep depositors from withdrawing their money, obstacles few dared to protest, mentioned the

"other thousands of humiliations you inflict upon those who go to withdraw their money from you; you detain them and make them waste money waiting and threaten to pay them in weak currency. In this way you coerce them to give you all you want. You have found this way to steal, because when they go to withdraw their money they do not dare ask for cash, but leave the money with you in order to collect much larger and more infernal profits." (Instrucción de mercaderes, p. 183)

Finally, Marx also mentions the fear and reverence bankers inspire in everyone. He cites the following ironic words of G.M. Bell:

"The knit brow of the banker has more influence over him than the moral preaching of his friends; does he not tremble to be suspected of being guilty of fraud or of the least false statement, for fear of causing suspicion, in consequence of which his banking accommodation might be restricted or cancelled? The advice of the banker is more important to him than that of the clergyman. (Karl Marx, Capital, vol. 3: The Process of Capitalist Production as a Whole, Frederick Engels, ed., Ernest Untermann, trans." [Chicago: Charles H. Kerr and Company, 1909], p. 641)

(8) Isocrates, “Sobre un asunto bancario,” pp. 114 and 117.

(9) The Greeks distinguished between monetary demand deposits (phanerà ousía) and invisible deposits (aphanés ousía). The distinction, rather than denote whether or not the money was continually available to the depositor (in both cases it should have been), appears to have referred to whether or not the deposit and its amount were publicly known. If they were, the money could be seized or confiscated, mostly for tax reasons.

(10) Isocrates, “Sobre un asunto bancario,” p. 116.

(11) Demosthenes, Discursos privados I, Biblioteca Clásica Gredos (Madrid: Editorial Gredos, 1983), pp. 157–80. The passages from the text are found on pp. 162, 164 and 176, respectively, of the above edition. For information on the failure of Greek banks, see Edward E. Cohen, Athenian Economy and Society: A Banking Perspective (Princeton, N.J.: Princeton
University Press, 1992), pp. 215–24. Nevertheless, Cohen does not seem to understand the way in which bank credit expansions caused the economic rises affecting the solvency of banks.

(12) Demosthenes, Discursos privados II, Biblioteca Clásica Gredos (Madrid: Editorial Gredos, 1983), pp. 79–98. The passage mentioned in the main text is found on p. 86.

(13) Ibid., pp. 99–120. The passage cited is found on p. 102.

(14) G.J. Costouros, “Development of Banking and Related Book-Keeping Techniques in Ancient Greece,” International Journal of Accounting 7, no. 2 (1973): 75–81.

(15) Demosthenes, Discursos privados II, p. 119.

(16) Ibid., p. 112.

(17) Ibid., p. 120.

(18) Stephen C. Todd, in reference to Athenian banking, affirms that

"banks were not seen as obvious sources of credit . . . it is striking that out of hundreds of attested loans in the sources only eleven are borrowed from bankers; and there is indeed no evidence that a depositor could normally expect to receive interest from his bank." (S.C. Todd, The Shape of Athenian Law (Oxford: Clarendon Press, 1993), p. 251)

Bogaert, for his part, confirms that bankers paid no interest on demand deposits and even charged a commission for their custody and safekeeping:

"Les dépôts de paiement pouvaient donc avoir différentes formes. Ce qu’ils ont en commun est l’absence d’intérêts. Dans aucun des cas précités nous n’en avons trouvé des traces. Il est même possible que  certains banquiers aient demandé une commission pour la tenue de comptes de dépôt ou pour 'l’exécution des mandats.'" (Raymond Bogaert, Banques et banquiers dans les cités grecques [Leyden, Holland: A.W Sijthoff, 1968], p. 336)

Bogaert also mentions the absence of any indication that bankers in Athens maintained a certain fractional-reserve ratio (“Nous ne possédons malheureusement aucune indication concernant l’encaisse d’une banque antique,” p. 364), though we know that various bankers, including Pison, acted fraudulently and did not maintain a 100-percent reserve ratio. As a result, on many occasions they could not pay and went bankrupt.

(19) The money supply at Athens can thus be seen to consist of bank liabilities (“deposits”) and cash in circulation. The amount of increase in the bank portion of this money supply will depend on the volume and velocity of bank loans, the percentage of these loan funds immediately or ultimately redeposited in the trapezai, and the time period and volatility of deposits. (Cohen, Athenian Economy and Society, p. 13)

(20) Bogaert, Banques et banquiers dans les cités grecques, pp. 391–93.

(21) Ibid., p. 391.

(22) Trigo Portela, “Historia de la banca,” p. 238. Raymond Bogaert, in contrast, estimates Passio’s annual income before his death at nine talents, several times larger:

"Cela donne en tout pour environ 9 talents de revenus annuels. On comprend que le banquier ait pu constituer en peu d’années un important patrimonie, faire des dons généreux à la cité et faire les frais de cinq triérchies." (Bogaert, Banques et banquiers dans les cités grecques, p. 367 and also Cohen, Athenian Economy and Society, p. 67)

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#3) On August 03, 2009 at 10:13 AM, whereaminow (< 20) wrote:


De Soto is not alone in his plans for monetary reform, although his is quite original.  See the final chapter of his work, for the intracacies of his plan. I will post that in its entirety as well once we get to that point.  Also Murray Rothbard in Mystery of Banking presented a plan for reform.  I may just dedicate an entire week to that topic later on down the road.

But first, we must establish exactly why the system is currently constructed as it is, so that no one will any longer be able to say that fractional reserve banking is in the public's best interest.

David in Qatar

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#4) On August 03, 2009 at 10:18 AM, chk999 (99.96) wrote:

I think you should read Lombard Street by Walter Bagehot. It is about the rise of fractional reserve banking in England, written by one of the best financial writers ever. Even though written in the 1800's it gets right at the core part of my question.

I'm familar with Murray Rothbard, being a long time small l libertarian, but have no wish to go back to the early 1800's from a financial standpoint.

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#5) On August 03, 2009 at 10:29 AM, whereaminow (< 20) wrote:


but have no wish to go back to the early 1800's from a financial standpoint. 

Maybe you will find out that the current standard is a relic that stretches back from 370 B.C. or earlier.  How "modern" is that?

Fractional Reserve banking has a long and sordid history.  It is nothing new or impressive, nor in any way "modern" and "dynamic."  It hinders our economy.  It does not help it.   Follow along with these posts, as we walk down memory lane from Greece to the Bank of Medici to the Bank of England to the Federal Reserve system.  There is nothing new about it.  Liberty and Honest 100% reserves are the new idea.

David in Qatar

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#6) On August 08, 2009 at 12:36 AM, DaretothREdux (50.88) wrote:

Liberty and Honest 100% reserves are the new idea.

Amen! Brother. Preach it. Preach it brother David!

For liberty,


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