Wednesday, July 20, 2011

A Keynesian Member of the House of Lords with a Dizzy Take on the History of Banking

Baron Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University and the author of an award-winning major three volume biography of John Maynard Keynes.

In a recent article discussing the eurocrisis, Baron Skidelsky provides us with a little of his understanding of how banking developed:
Banks grew out of a practice by gold smiths and silver smiths, who, for a small price, accepted deposits for safekeeping. When they became lending institutions, their earliest rule was to keep almost 100% of cash reserves against their loans, so that they would not be caught short if most of their depositors decided to withdraw their money at the same time.
Got that? He thinks the banks loaned out all the cash and simultaneously kept it all on hand. Another Keynesian wizard, up there with Krugman.

The idea behind correct banking is you hold 100% reserves against deposits that can be demanded immediately and that you match loans time wise against the deposits that are lock in for a specific period of time. Loaning money out and keeping 100% cash reserves doesn't make any sense now and wouldn't have when banking first developed.


  1. right - you time loans made to the bank with loans the bank makes. So, are demand deposits part of the bank's capitalization that it can loan money against as long as it adheres to some ratio of capital to loans?

  2. Rothbard disagrees

    "Before the seventeenth century, loans were generally made by banks, and 'banks' were institutions in which capitalists lent out funds that they had saved. There was no deposit banking; merchants who wanted a safe place to keep their surplus gold deposited them in King's Mint in the Tower of London - an institution accustomed to storing gold. This habit, however, proved highly costly, for King Charles I, needing money shortly before the outbreak of the civil war in 1638, simply confiscated the huge sum of 200 000 pounds in gold stored at the Mint - announcing it to be a 'loan' from the depositors. Understandably shaken by their experience, merchants began depositing their gold in the coffers of private gold smiths, who were also accustomed to the storing and safe keeping of precious metals. Soon, goldsmiths' notes began to function as private bank notes, the product of deposit banking.

    The Restoration government soon needed to raise a great deal of money for wars with the Dutch. Taxes were greatly increased, and the Crown borrowed extensively from the goldsmiths. In late 1671, King Charles II asked the bankers for further large loans to finance a new fleet. Upon the goldsmiths' refusal, the king proclaimed, on 5 January 1672, a 'stop of the Exchequer', that is, a wilful refusal to pay any interest or principal on much of the outstanding public debt. Some of the 'stopped' debt was owed by the government to suppliers and pensioners, but the vast bulk was held by the victimized goldsmiths. Indeed, of the total stopped debt of 1.21 million pounds, 1.17 was owned by the goldsmiths.

    ...The stop of the Exchequer, then, coming only two decades after the confiscation of the gold at the Mint, managed virtually to destroy at one blow private deposit banking and the government's credit." (History of Economic Thought Before Adam Smith, pp 228-229)

    Read the rest online at for the next step, the central bank.

  3. And Rothbard diagrees with what exactly?

  4. Skidelski claims that banking grew out of the practice of keeping deposits at goldsmiths. Rothbard is claiming the practice of keeping deposits at goldsmiths was the result of the king confiscating gold from the Mint and that banks existed prior to this development.

    I'm sorry for not explicitly stating this to make the point more clear.

  5. This is another illustration of what is before us in the USA. Thank you for the historical analogy. Confiscation! I know it well. Gold coins given me as a child for birthdays etc were "taken" by FDR's government. My family turned them in since they were patriotic Americans and honored the law.