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1. Warehouse Receipts

Deposit banking began as a totally different institution from loan banking. Hence it was unfortunate that

the same name, bank, became attached to both. If loan banking was a way of channeling savings into

productive loans to earn interest, deposit banking arose to serve the convenience of the holders of gold and

silver. Owners of gold bullion did not wish to keep it at home or office and suffer the risk of theft; far better to

store the gold in a safe place. Similarly, holders of gold coin found the metal often heavy and inconvenient to

carry, and needed a place for safekeeping. These deposit banks functioned very much as safe-deposit boxes

do today: as safe “money warehouses.” As in the case of any warehouse, the depositor placed his goods on

deposit or in trust at the warehouse, and in return received a ticket (or warehouse receipt) stating that he could

redeem his goods whenever he presented the ticket at the warehouse. In short, his ticket or receipt or claim

check was to be instantly redeemable on demand at the warehouse.

Money in a warehouse can be distinguished from other deposited goods, such as wheat, furniture,

jewelry, or whatever. [p. 88] All of these goods are likely to be redeemed fairly soon after storage, and then

revert to their regular use as a consumer or capital good. But gold, apart from jewelry or industrial use, largely

serves as money, that is, it is only exchanged rather than used in consumption or production. Originally, in

order to use his gold for exchange, the depositor would have to redeem his deposit and then turn the gold over

to someone else in exchange for a good or service. But over the decades, one or more money warehouses, or

deposit banks, gained a reputation for probity and honesty. Their warehouse receipts then began to be

transferred directly as a surrogate for the gold coin itself. The warehouse receipts were scrip for the real thing,

in which metal they could be redeemed. They functioned as “gold certificates.”1 In this situation, note that the

total money supply in the economy has not changed; only its form has altered. Suppose, for example, that the

initial money supply in a country, when money is only gold, is $100 million. Suppose now that $80 million in

gold is deposited in deposit banks, and the warehouse receipts are now used as proxies, as substitutes, for

gold. In the meanwhile, $20 million in gold coin and bullion are left outside the banks in circulation. In this case,

the total money supply is still $100 million, except that now the money in circulation consists of $20 million in

gold coin and $80 million in gold certificates standing in for the actual $80 million of gold in bank vaults.

Deposit banking, when the banks really act as genuine money warehouses, is still eminently productive and


How can deposit banks charge for this important service? In the same way as any warehouse or

safe-deposit box: by charging a fee in proportion to the time that the deposit remains in the bank vaults. There

should be no mystery or puzzlement about this 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 [p. 89] in a warehouse, in law and in justice the furniture does not show up as an asset of the warehouse during the time that I keep it


The warehouse does not add $5,000 to both its assets and liabilities because it in no sense owns the

furniture; neither can we say that I have loaned the warehouse the furniture for some indefinite 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 transaction is not a loan but a bailment, hiring someone for the safekeeping of


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 present—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 presents 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 in Amsterdam and

Hamburg in the seventeenth and eighteenth centuries. [p. 90]

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 London—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, amounting to £200,000, calling it a”loan” from the depositors. Although the merchants finally

got their money back, they were understandably 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 valuable 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 outright—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, 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 valuables 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. [p. 91]

In some forms of warehousing, the temptation to embezzle is particularly heady. The depositor is here

not so much interested in getting back the specific object as he is in receiving the same kind of product. This

will occur in the case of fungible commodities such as grain, where each unit of the product is identical to

every other. Such a deposit is a “general” rather than a “specific” deposit warrant It now becomes more

convenient for the warehouseman to mix all bushels of grain of the same type into a common bin, so that

anyone redeeming his grain receives bushels from the same bin. But now the temptation to embezzle has

increased enormously. All the warehouseman need do is arrive at a workable estimate of what percentage of

the grain will probably be redeemed in the next month or year, and then he can lend out or speculate on the


In sophisticated transactions, however, the warehouseman is not likely physically to remove the grain.

Since warehouse receipts serve as surrogates for the grain itself, the warehouseman will instead print fake, or

counterfeit, warehouse receipts, which will look exactly like the others.

But, it might be asked, what about the severe legal penalties for embezzlement? Isn’t the threat of

criminal charges and a jail term enough to deter all but the most dedicated warehouse embezzlers? Perhaps,

except for the critical fact that bailment law scarcely existed until the eighteenth century. It was only by the

twentieth century that the courts finally decided that the grain warehouseman was truly a bailee and not simply

a debtor.