Conceived in Liberty Volume 2 - Ludwig von Mises Institute

then be acquired either by direct production, or by purchasing some other
good or service and exchanging it for money.
National monetary units were not regarded as independent entities in any
sense, but merely national names for units of weight of gold or silver. Hence,
foreign coins of varying weights of gold and silver could and did easily circulate
throughout the world, if unhampered by government regulations, since
their value rested in their specie content rather than in their name. Until the
seventeenth century, money was gold or silver or some other commodity, and
there was no way to increase its stock except by purchasing more of the metal.
The kings and princes, it is true, found a way to increase their share: by
debasement—devaluating the specie content of the national coin and unit,
and keeping the remainder, the "seigniorage," for themselves.
Credit exchanges and merchant banking developed during the flowering of
commercial capitalism of the medieval northern Italian cities. At first, these
banking transactions promoted the advance of the market and of commercial
capitalism without adding to or disturbing the supply of money. Eventually,
however, some of the bankers began to accept deposits of money for safekeeping,
and then began profiting on their depositors' money by lending out the
money or lending newly created deposit claims on the money deposits. In this
way, new money, or rather new evidences of money, was pumped into the
economy essentially out of thin air, and by means of virtual embezzlement of
depositors' funds.
Deposit banking did not loom large in the Italian or European economy,
however, and failures by deposit bankers in Venice led to government banking
based on true money-warehouse principles. In 1587, Venice established a
deposit bank in which deposits were matched one hundred percent by money
in the bank's vaults; therefore, no fraudulent or inflationary increase of the
money supply could take place. By 1619, however, the government's need for
funds and the temptation to cheat brought about a relaxation of the onehundred-percent
rule. Soon the one-hundred-percent principle was followed
by new banks created in other cities, especially at Amsterdam in 1609 and at
Hamburg ten years later.
In England, commercial banking began in the mid-seventeenth century
with gold being deposited for safekeeping with London goldsmiths, who
issued notes or book claims as evidences of gold deposited there. Since the
depositors were the true owners of the gold, there were not supposed to be
more such warehouse receipts than gold in the vaults. But eventually, the
goldsmiths began to yield to the temptation of fraudulently increasing the
money supply, through issue of pseudowarehouse receipts. Yet, before the late
seventeenth century, there was no important amount of bank money or bank
issues beyond gold or silver (and that generally ancillary to other financial
business) and none at all in the American colonies. And there was no case at
all concerning the issue of government paper money, let alone government
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