The Mystery of Banking

part of the banking process. 
How do these warehouse receipt transactions relate to the T-
account balance sheets of the deposit banks? In simple justice, not
at all. When I store a piece of furniture worth $5,000 in a ware-
house, in law and in justice the furniture does 
not
show up as an
asset of the warehouse during the time that I keep it there. 
The warehouse does not add $5,000 to both its assets and lia-
bilities because it in no sense 
owns
the furniture; neither can we
say that I have 
loaned
the warehouse the furniture for some indef-
inite time period. The furniture is mine and remains mine; I am
only keeping it there for safekeeping and therefore I am legally
and morally entitled to redeem it any time I please. I am not
therefore the bank’s “creditor”; it doesn’t 
owe
me money which
I may some day collect. Hence, there is no debt to show up on the
Equity + Liability side of the ledger. Legally, the entire transac-
tion is not a loan but a 
bailment
, hiring someone for the safekeep-
ing of valuables. 
Let us see why we are dealing with a bailment, not a loan. In
a loan, or a 
credit transaction
, the creditor exchanges a 
present
good
—that is, a good available for use at any time in the pres-
ent—for a 
future good,
an IOU redeemable at some date in the
future. Since present goods are more valuable than future goods,
the creditor will invariably charge, and the debtor pay, an interest
premium for the loan. 
The hallmark of a loan, then, is that the money is due at some
future date and that the debtor pays the creditor interest. But the
deposit, or 
claim transaction
, is precisely the opposite. The
money must be paid by the bank 
at any time 
the depositor pres-
ents the ticket, and not at some precise date in the future. And the
bank—the alleged “borrower” of the money—generally does not
pay the depositor for making the loan. Often, it is the depositor
who pays the bank for the service of safeguarding his valuables. 
Deposit banking, or money warehousing, was known in
ancient Greece and Egypt, and appeared in Damascus in the early
thirteenth century, and in Venice a century later. It was prominent
Deposit Banking
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in Amsterdam and Hamburg in the seventeenth and eighteenth
centuries. 
In England, there were no banks of deposit until the Civil War
in the mid-seventeenth century. Merchants were in the habit of
keeping their surplus gold in the king’s mint in the Tower of Lon-
don—an institution which of course was accustomed to storing
gold. The habit proved to be an unfortunate one, for when
Charles I needed money in 1638 shortly before the outbreak of
the Civil War, he simply confiscated a large sum of gold, amount-
ing to £200,000, calling it a “loan” from the depositors. Although
the merchants finally got their money back, they were under-
standably shaken by the experience, and forsook the mint, instead
depositing their gold in the coffers of private goldsmiths, who
were also accustomed to the storing and safekeeping of the valu-
able metal.
2
The goldsmith’s warehouse receipts then came to be
used as a surrogate for the gold money itself.
3
All men are subject to the temptation to commit theft or fraud,
and the warehousing profession is no exception. In warehousing,
one form of this temptation is to steal the stored products out-
right—to skip the country, so to speak, with the stored gold and
jewels. Short of this thievery, the warehouse man is subject to a
more subtle form of the same temptation: to steal or “borrow” the
valuables “temporarily” and to profit by speculation or whatever,
returning the valuables before they are redeemed so that no one
will be the wiser. This form of theft is known as 
embezzlement
,
88
The Mystery of Banking
2
The business of the goldsmiths was to manufacture gold and silver
plate and jewelry, and to purchase, mount and sell jewels. See J. Milnes
Holden, 
The History of Negotiable Instruments in English Law
(London:
The Athlone Press, 1955), pp. 70–71.
3
These were two other reasons for the emergence of the goldsmiths as
money warehouses during the Civil War. Apprentices, who had previously
been entrusted with merchants’ cash, were now running off to the army, so
that merchants now turned to the goldsmiths. At the same time, the gold
plate business had fallen off, for impoverished aristocrats were melting
down their gold plate for ready cash instead of buying new products.
Hence, the goldsmiths were happy to turn to this new form of business.
Ibid.
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which the dictionary defines as “appropriating fraudulently to
one’s own use, as money or property entrusted to one’s care.” 
But the speculating warehouseman is always in trouble, for
the depositor can come and present his claim check 
at any time,
and he is legally bound to redeem the claim, to return the valu-
ables instantly on demand. Ordinarily, then, the warehousing
business provides little or no room for this subtle form of theft. If
I deposit a gold watch or a chair in a warehouse, I want the object
when I call for it, and if it isn’t there, the warehouseman will be
on a trip to the local prison. 
In some forms of warehousing, the temptation to embezzle is