Lecture Notes: The Secret Science of Banking

Introduction

• Chapter 9 from "The Creature from Jekyll Island" by G. Edward Griffin.
• Focus on fractional reserve banking.
• Overview of history, fraud, booms, busts, and economic chaos.
• Establishment of the Bank of England and its influence on the Federal Reserve System.

Early Banking Systems

• Origins:
  • Banks of deposit first appeared in early Greece, India, and Egypt.
  • Venice is considered the cradle of modern banking.
• Regulation in Venice:
  • Venetian Senate imposed laws to prevent abuse.
  • Bankers required to open books for public inspection.
  • Largest bank closure in 1584 due to reserve lending.
• Banco de a Piazza delle Rialto (1524):
  • State bank established with no loan permissions.
  • Prosperous due to stable banking practices.

Banking in Europe

• 16th & 17th Century:
  • Banks across Europe engaged in lending money not available, leading to failures.
  • Bank of Amsterdam (1609) followed sound banking principles, later succumbed to overdrawn accounts and lending.
• Bank of Hamburg:
  • Last example of honest banking, eventually succumbed to foreign invasion and fractional reserve principles.

England's Banking Evolution

• Exchequer Order and Bills:
  • First paper money issued by Charles II, later replaced by Exchequer bill redeemable in gold.
• Bank of England (1694):
  • Given monopoly to issue banknotes.
  • Created money out of nothing for government loans, started with 1.2 million pounds.
  • Parliament saved the bank during runs, protecting it from insolvency.

The Secret Science of Money

• Cabal Formation:
  • Alliance between political and monetary scientists.
  • Seven-point plan leading to the establishment of the Bank of England.
• Monetary Benefits:
  • Government received more money than sought.
  • Bank benefitted from creating money and lending it to the government and the public.

Economic Cycles and Crises

• Inflation and Banking Failures:
  • New money led to inflation, doubling prices in two years.
  • Suspension of specie payments to save the bank.
  • Repeated cycles of booms and busts due to fractional reserve banking.
• Reform Attempts:
  • Peel's Bank Act of 1844 tried to limit money creation but failed.
  • Repeated bank failures and government interventions.

Global Spread of the Central Bank Model

• Adoption by Other Countries:
  • Model spread to Europe and inspired the Federal Reserve System.
  • Governments and bankers benefitted, while the public remained largely unaware.

Conclusion

• Summary of Banking History:
  • Initially honest banking gave way to fractional reserve practices.
  • Resulted in a history of economic instability.
  • Partnership between banks and governments institutionalized through the Bank of England.