"
"
The fall of the Roman Empire meant the disappearance of
most of its trade and the feudalization of economic and social
relationships. The enormous reduction in trade and in the
division of labor dealt a definitive blow to financial activities,
especially banking. The effects of this reduction lasted several
centuries. Only monasteries, secure centers of economic and
social development, could serve as guardians of economic
resources. It is important to mention the activity in this field of
the Templars, whose order was founded in 1119 in Jerusalem
to protect pilgrims. The Templars possessed significant finan-
cial resources obtained as plunder from their military cam-
paigns and as bequests from feudal princes and lords. As they
were active internationally (they had more than nine thousand
centers and two headquarters) and were a military and reli-
gious order, the Templars were safe custodians for deposits
and had great moral authority, earning them the trust of the
people. Understandably, they began to receive both regular
and irregular deposits from individuals, to whom they
charged a fee for safekeeping. The Templars also carried out
transfers of funds, charging a set amount for transportation
and protection. Moreover, they made loans of their own
resources and did not violate the safekeeping principle on
demand deposits. The order acquired a growing prosperity
which aroused the fear and envy of many people, until Philip
the Fair, the King of France, decided to dissolve it. He con-
demned those in charge to be burned at the stake (including
Jacques de Molay, the Grand Maître), with the prime objective
of appropriating all of the order’s riches.37
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 59
37See, for example, Jules Piquet’s book, Des banquiers au Moyen Age: Les
Templiers, Étude de leurs opérations financièrs (Paris, 1939), cited by
Henri Pirenne in his work, Histoire Économique et Sociale Du Moyen Age
(Paris: Presses Universitaires de France, 1969), pp. 116 and 219. Piquet
believes he sees the beginnings of double-entry bookkeeping and even
a primitive form of check in the records kept by the Templars. How-
ever, it appears the Templars’ accounting practices were, at most, mere
direct predecessors of double-entry bookkeeping, later formalized in
The end of the eleventh century and beginning of the
twelfth brought a moderate resurgence of business and trade,
mainly among the Italian cities on the Adriatic (especially
Venice), Pisa, and later, Florence. These cities specialized in
trade with Constantinople and the Orient. Significant financial
growth in these cities led to the revival of banking, and the pat-
tern we observed in the classical world was reproduced.
Indeed, bankers at first respected the juridical principles passed
down from Rome and conducted their business lawfully, avoid-
ing illicit use of demand deposits (i.e., irregular deposits of
money). Only money received as loans (i.e., time “deposits”)
was used or lent by bankers, and only during the agreed-upon
term.38Nevertheless, bankers again became tempted to take
advantage of money from demand deposits. This was a gradual
process which led to abuses and the resumption of fractional-
reserve banking. The authorities were generally unable to
enforce legal principles and on many occasions even granted
privileges and licenses to encourage bankers’ improper activity
and derive benefits from it, in the shape of loans and tax rev-
enues. They even created government banks (such as
60
Money, Bank Credit, and Economic Cycles
1494 by Luca Pacioli, the great Venetian monk and friend of Leonardo
da Vinci. A bank in Pisa used double-entry bookkeeping as early as
1336, as did the Masari family (tax collectors in Genoa) in 1340. The
oldest European account book we have evidence of came from a Flo-
rentine bank and dates back to 1211. See G.A. Lee, “The Oldest Euro-
pean Account Book: A Florentine Bank Ledger of 1211,” in Accounting
History: Some British Contributions, R.H. Parker and B.S. Yamey, eds.
(Oxford: Clarendon Press, 1994), pp. 160–96.
38
In theory at least, early banks of deposit were not discount
or lending banks. They did not create money but served a
system of 100 percent reserves, such as some monetarists
today would like to see established. Overdrafts were forbid-
den. In practice, the standards proved difficult to maintain,
especially in face of public emergency. The Taula de Valen-
cia was on the verge of using its deposited treasure to buy
wheat for the city in 1567. Illegal advances were made to city
officials in 1590 and illegal loans to the city itself on a num-
ber of occasions. (Charles P. Kindleberger, A Financial His-
tory of Western Europe, 2nd ed. [Oxford: Oxford University
Press, 1993], p. 49)
Barcelona’s Bank of Deposit, or Taula de Canvi, and others we
will consider later).39
THE REVIVAL OF DEPOSIT BANKING IN MEDITERRANEAN EUROPE
Abbott Payson Usher, in his monumental work, The Early
History of Deposit Banking in Mediterranean Europe,40studies the
gradual emergence of fractional-reserve banking during the
late Middle ages, a process founded on the violation of this
general legal principle: full availability of the tantundem must
be preserved in favor of the depositor. According to Usher, it
is not until the thirteenth century that some private bankers
begin to use the money of their depositors to their own advan-
tage, giving rise to fractional-reserve banking and the oppor-
tunities for credit expansion it entails. Moreover, and contrary
to a widely-held opinion, Usher believes this to be the most
significant event in the history of banking, rather than the
appearance of banks of issue (which in any case did not occur
until much later, in the late seventeenth century). As we will
see in chapter 4, although exactly the same economic effects
result from the issuance of bank notes without financial back-
ing and the loaning of funds from demand deposits, banking
was historically shaped more by the latter of these practices
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 61
39Islamic law also banned bankers’ personal use of irregular deposits
throughout the medieval period, especially on the Iberian Peninsula.
See, for instance, the Compendio de derecho islámico (Risála, Fí-l-Fiqh), by
the tenth-century Hispano-Arabic jurist Ibn Abí Zayd, called Al-
Qayrawání, published with the support of Jesús Riosalido (Madrid: Edi-
torial Trotta, 1993). On p. 130 we find the following statement of a juridi-
cal principle: “he who uses a money deposit to do business commits a
reprehensible act, but if he uses his own money, he may keep the profit.”
(See also pp. 214–15, where it is stipulated that, in the case of a true loan
or mutuum, the lender may not withdraw the money at will, but only at
the end of the agreed-upon term; the Islamic legal concept of money
deposit closely parallels that of the Roman irregular deposit.)
40Abbott Payson Usher taught economics at Harvard University and
authored the celebrated work, The Early History of Deposit Banking in
Mediterranean Europe (Cambridge, Mass.: Harvard University Press,
1943).
than by the former. Usher states that: “the history of banks of
issue has, until lately, obscured the importance of due deposit
banking in all its forms, whether primitive or modern.” In an
ironic reference to the undue importance given by economists
to the problems of banks of issue versus the older but equally
harmful activities of deposit banks, he concludes that:
the demand for currency, and the theoretical interests cre-
ated by the problem, did much to foster misconceptions on
the relative importance of notes and deposits. Just as French
diplomats “discovered” the Pyrenees in the diplomatic cri-
sis of the eighteenth century, so banking theorists “discov-
ered” deposits in the mid-nineteenth century.41
Again and again, Usher shows that the modern banking
system arose from fractional-reserve banking (itself the result of
fraud and government complicity, as Usher illustrates in detail
via the example of the late medieval Catalonian banking sys-
tem), and not from banks of issue, which appeared much later.
Usher points out that the first banks in twelfth-century
Genoa made a clear distinction in their books between demand
deposits and “time” deposits, and recorded the latter as loans
or mutuum contracts.42However, bankers later began gradu-
ally to make self-interested use of demand deposits, giving rise
to expansionary capabilities present in the banking system;
more specifically, the power to create deposits and grant cred-
its out of nowhere. Barcelona’s Bank of Deposit is a case in
point. Usher estimates that the bank’s cash reserves amounted
to 29 percent of total deposits. This meant their capacity for
credit expansion was 3.3 times their cash reserves.43
62
Money, Bank Credit, and Economic Cycles
41Ibid., pp. 9 and 192.
42“In all these Genoese registers there is also a series of instruments in
which the money received is explicitly described as a loan (mutuum).”
Ibid., p. 63.
43
Against these liabilities, the Bank of Deposit held reserves in
specie amounting to 29 percent of the total. Using the phrase-
ology of the present time, the bank was capable of extending
credit in the ratio of 3.3 times the reserves on hand. (Ibid., p.
181)
Usher also highlights the failure of public officials at dif-
ferent levels to enforce sound banking practices, particularly a
100-percent reserve requirement on demand deposits. More-
over, the authorities ended up granting banks a government
license (a privilege—ius privilegium) to operate with a frac-
tional reserve. Banks were nevertheless required to guarantee
deposits.44At any rate, rulers were usually the first to take
advantage of fraudulent banking, finding loans an easy source
of public financing. It is as if bankers were granted the privi-
lege of making gainful use of their depositors’ money in
return for their unspoken agreement that most of such use be
in the shape of loans to public officials and funding for the
government. On various occasions, rulers went so far as to
create government banks, in order to directly reap the consid-
erable profits available in banking. As we will see, Barcelona’s
Bank of Deposit, the Taula de Canvi, was created with this main
objective.
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 63
However, we cannot agree with the statement Usher makes immedi-
ately afterward; he contends that private banks also operating in
Barcelona at the time must have had a much lower reserve ratio. Quite
the opposite must have been true. As private banks were smaller, they
would not have inspired as much confidence in the public as the munic-
ipal bank did, and as they operated in a strictly competitive environ-
ment, their cash reserves must have been higher (see pp. 181–82 of
Usher’s book). In any case, Usher concludes that
there was considerable centralization of clearance in the early
period and extensive credit creation. In the absence of com-
prehensive statistical records, we have scarcely any basis for
an estimate of the quantitative importance of credit in the
medieval and early modern periods, though the implications
of our material suggest an extensive use of credit purchasing
power. (Ibid., pp. 8–9)
We will later cite works by C. Cipolla, which fully confirm Usher’s main
thesis. In chapter 4 we will examine bank multipliers in depth.
44In fifteenth-century Catalonia, guarantees were not required, though
only bankers who offered them were allowed to spread tablecloths over
their counters. By this system, the public could easily identify the more
solvent businesses. Ibid., p. 17.
THE CANONICAL BAN ON USURY AND THE
“DEPOSITUM CONFESSATUM”
The ban on usury by the three major monotheistic reli-
gions (Judaism, Islam and Christianity) did much to compli-
cate and obscure medieval financial practices. Marjorie Grice-
Hutchinson has carefully studied the medieval prohibition of
interest and its implications.45She points out that Jews were
not forbidden to loan money at interest to Gentiles, which
explains why, at least during the first half of the medieval
period, most bankers and financiers in the Christian world
were Jewish.46
This canonical ban on interest added greatly to the intrica-
cies of medieval banking, though not (as many theorists have
insisted) because bankers, in their attempt to offer a useful,
necessary service, were forced to constantly search for new
ways to disguise the necessary payment of interest on loans.
When bankers loaned money received from clients as a loan
(or “time” deposit), they were acting as true financial inter-
mediaries and were certainly doing a legitimate business and
significantly contributing to the productive economy of their
time. Still, the belated recognition by the Church of the legiti-
macy of interest should not be regarded as overall approval of
the banking business, but only as authorization for banks to
loan money lent to them by third parties. In other words, to
64
Money, Bank Credit, and Economic Cycles
45Marjorie Grice-Hutchinson, Early Economic Thought in Spain 1177–
1740 (London: George Allen and Unwin, 1978). See “In Concealment of
Usury,” chap. 1, pp. 13–60.
46
Until the thirteenth century, the greater part of financial activ-
ity was in the hands of Jews and other non-Christians, usually
from the Near East. For such unbelievers from the Christian
point of view there could be no salvation in any event, and
the economic prohibitions of the Church did not apply to
them. . . . Hatred for the Jews arose on the part of the people
who resented such interest rates, while monarchs and
princes, if less resentful, scented profits from expropriation of
this more or less helpless group. (Harry Elmer Barnes, An Eco-
nomic History of the Western World [New York: Harcourt, Brace
and Company, 1940], pp. 192–93)
act as mere financial intermediaries. The evolution of Church
doctrine on interest in no way implies a sanction of fractional-
reserve banking, i.e., bankers’ self-interested use (which usu-
ally means granting loans) of demand deposits.47
To a great extent, the conceptual confusion we are dealing
with arose in the Middle Ages as a result of the canonical ban
on interest. One of the main artifices48devised by economic
agents to conceal actual interest-paying loans was to disguise
them as demand deposits. Let us see how they did it. First, we
must think back to our discussion of the monetary irregular-
deposit contract in chapter 1. One of the most notable guide-
lines found for this contract in the Corpus Juris Civilis stipu-
lated that, if the depositary were unable to return the deposit
on demand, not only was he guilty of theft for misappropria-
tion, but he was also obliged to pay interest to the depositor
for his delay in repayment (Digest, 16, 3, 25, 1). Hence, it
should come as no surprise that throughout the Middle Ages,
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 65
47This is precisely the opinion held by Father Bernard W. Dempsey S.J.,
who concludes in his remarkable book Interest and Usury (Washington,
D.C.: American Council of Public Affairs, 1943) that even if we accept
interest as legitimate, fractional-reserve banking amounts to “institu-
tional usury” and is especially harmful to society, since it repeatedly
generates artificial booms, bank crises and economic recessions (p.
228).
48A clear, concise list of the tricks used to systematically disguise loans
and interest can be found in Imbert’s book, Historia económica (de los orí-
genes a 1789), pp. 157–58. Imbert mentions the following methods of
concealing interest-bearing loans: (a) bogus contracts (such as repur-
chase agreements or real estate guarantees); (b) penalty clauses (dis-
guising interest as economic sanctions); (c) lying about the amount of
the loan (the borrower agreed to repay a sum higher than the actual
loan); (d) foreign exchange transactions (which included the interest as
an additional charge); and (e) income or annuities (life annuities includ-
ing a portion of both the interest and the repayment of the principal).
Jean Imbert makes no express mention of the depositum confessatum, one
of the most popular ways of justifying interest. It fits well into the
“penalty clauses” category. See also the reference Henri Pirenne makes
to the “utmost ingenuity” used to conceal “dangerous interest.” Eco-
nomic and Social History of Medieval Europe (London: Kegan Paul, Trench,
Trubner and Company, 1947), p. 140.
in order to circumvent the canonical ban on interest, many
bankers and “depositors” expressly declared that they had taken
part in a monetary irregular-deposit contract, when they had
actually formalized a true loan or mutuum contract. The
method of concealment to which this declaration belonged was
aptly named depositum confessatum. It was a simulated deposit
which, despite the declarations of the two parties, was not a
true deposit at all, but rather a mere loan or mutuum contract.
At the end of the agreed-upon term, the supposed depositor
claimed his money. When the professed depositary failed to
return it, he was forced to pay a “penalty” in the shape of inter-
est on his presumed “delay,” which had nothing to do with the
actual reason for the “penalty” (the fact that the operation was
a loan). Disguising loans as deposits became an effective way
to get around the canonical ban on interest and escape severe
sanctions, both secular and spiritual.
The depositum confessatum eventually perverted juridical
doctrine on the monetary irregular deposit, robbing these
tenets of the clarity and purity they received in classical Rome
and adding confusion that has persisted almost to the present
day. In fact, regardless of experts’ doctrinal stand (either
strictly against, or “in favor” within reasonable limits) on
interest-bearing loans, the different approaches to the deposi-
tum confessatum led theorists to stop distinguishing clearly
between the monetary irregular deposit and the mutuum con-
tract. On one hand, over-zealous canonists, determined to
expose all hidden loans and condemn the corresponding
interest, tended to automatically equate deposit contracts with
mutuum contracts. They believed that by exposing the loan
they assumed was behind every deposit they would put an
end to the pretense of the depositum confessatum. This is pre-
cisely where their error lay: they regarded all deposits, even
actual ones (made with the essential purpose of safeguarding
the tantundem and keeping it always available to the deposi-
tor) as deposita confessata. On the other hand, those experts
who were relatively more supportive of loans and interest and
searched for ways to make them acceptable to the Church,
defended the depositum confessatum as a kind of precarious
loan which, according to the principles embodied in the
Digest, justified the payment of interest.
66
Money, Bank Credit, and Economic Cycles
As a result of both doctrinal stances, scholars came to
believe that the “irregularity” in the monetary irregular
deposit referred not to the deposit of a certain quantity of a
fungible good (the units of which were indistinguishable from
others of the same type and the tantundem of which was to be
kept continually available to the depositor), but rather to the
irregularity of always disguising loans as deposits.49Further-
more, bankers, who had used the depositum confessatum to dis-
guise loans as deposits and to justify the illegal payment of
interest, eventually realized that the doctrine which held that
deposits always concealed loans could also be extremely prof-
itable to them, because they could employ it to defend even
the misappropriation of money which had actually been
placed into demand deposits and had not been loaned. Thus,
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 67
49Canonists’ equation of the monetary irregular deposit with the
mutuum or loan contract led experts to search for a common juridical
feature between the two contracts. They soon realized that in the deposit
of a fungible good, “ownership” of the individual units deposited is
“transferred,” since the depositary is only obliged to safeguard, main-
tain, and return upon demand the tantundem. This transfer of ownership
appears to coincide with that of the loan or mutuum contract, so it was
natural for scholars to automatically assume that all monetary irregular
deposits were loans, since both include a “transfer” of “ownership” from
the depositor to the depositary. Hence, theorists overlooked the essential
difference (see chapter 1) between the monetary irregular deposit and
the mutuum or loan: the main purpose of the irregular deposit is the cus-
tody and safekeeping of the good, and while “ownership” is in a sense
“transferred,” availability is not, and the tantundem must be kept contin-
ually available to the depositor. In contrast, a loan entails the transfer of
full availability, apart from ownership (in fact, present goods are
exchanged for future goods) and involves this fundamental element: a
term during which the goods cease to be available to the lender. Irregu-
lar deposits do not include such a term. In short, since the canonical pro-
hibition of interest gave rise to the fraudulent and spurious institution of
the depositum confessatum, it was indirectly responsible for the loss of clar-
ity in the distinction between the monetary irregular deposit and the
mutuum. This confusion is clearly behind the wrong 1342 final court
decision on the Isabetta Querini vs. The Bank of Marino Vendelino case, men-
tioned by Reinhold C. Mueller in The Venetian Money Market: Banks, Pan-
ics, and the Public Debt, 1200–1500 (Baltimore: Johns Hopkins University
Press, 1997), pp. 12–13.
the canonical ban on interest had the unexpected effect of
obscuring Roman jurists’ clear, legal definition of the mone-
tary irregular-deposit contract. Many capitalized on the ensu-
ing confusion in an attempt to legally justify fraudulent bank-
ing and the misappropriation of demand deposits. Experts
failed to clear up the resulting legal chaos until the end of the
nineteenth century.50
Let us now examine three particular cases which together
illustrate the development of medieval banking: Florentine
banks in the fourteenth century; Barcelona’s Bank of Deposit,
the Taula de Canvi, in the fifteenth century and later; and the
Medici Bank. These banks, like all of the most important
banks in the late Middle Ages, consistently displayed the pat-
tern we saw in Greece and Rome: banks initially respected the
traditional legal principles found in the Corpus Juris Civilis,
i.e., they operated with a 100-percent reserve ratio which
guaranteed the safekeeping of the tantundem and its constant
availability to the depositor. Then, gradually, due to bankers’
greed and rulers’ complicity, these principles began to be vio-
lated, and bankers started to loan money from demand
68
Money, Bank Credit, and Economic Cycles
50In fact, Pasquale Coppa-Zuccari, whose work we have already cited, was
the first to begin to reconstruct the complete legal theory of the monetary
irregular deposit, starting from the same premise as the classical Roman
scholars and again revealing the illegitimacy of banks’ misappropriation of
demand deposits. Regarding the effects of the depositum confessatum on
the theoretical treatment of the juridical institution of irregular deposit,
Coppa-Zuccari concludes that
le condizioni legislative dei tempi rendevano fertile il terreno
in cui il seme della discordia dottrinale cadeva. Il divieto
degli interessi nel mutuo non valeva pel deposito irregolare.
Qual meraviglia dunque se chi aveva denaro da impiegare
fruttuosamente lo desse a deposito irregolare, confessatum se
occorreva, e non a mutuo? Quel divieto degli interessi, che
tanto addestrò il commercio a frodare la legge e la cui effica-
cia era nulla di fronte ad un mutuo dissimulato, conservò in
vita questo ibrido instituto, e fece sì che il nome di deposito
venissi imposto al mutuo, che non poteva chiamarsi col pro-
prio nome, perchè esso avrebbe importato la nullità del patto
relativo agli interessi. (Coppa-Zuccari, Il deposito irregolare,
pp. 59–60)
deposits, often, in fact, to rulers. This gave rise to fractional-
reserve banking and artificial credit expansion, which in the
first stage appeared to spur strong economic growth. The
whole process ended in a general economic crisis and the fail-
ure of banks that could not return deposits on demand once
the recession hit and they had lost the trust of the public.
Whenever loans were systematically made from demand
deposits, the historical constant in banking appears to have
been eventual failure.51 Furthermore, bank failures were
accompanied by a strong contraction in the money supply
(specifically, a shortage of loans and deposits) and by the
resulting inevitable economic recession. As we will see in the
following chapters, it took economic scholars nearly five cen-
turies to understand the theoretical causes of all of these
processes.52
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 69
51For example, Raymond Bogaert mentions that of the 163 known banks
in Venice, documentary evidence exists to show that at least 93 of them
failed. Bogaert, Banques et banquiers dans les cités grecques, note 513, p.
392. A detailed list of 46 failures of deposit banks in Venice can also be
seen in Mueller, The Venetian Money Market, pp. 585–86. This same fate
of failures affected all banks in Seville in the 15th century. Hence, the
systematic failure of fractional-reserve private banks not supported by
a central bank (or equivalent) is a fact of history. Pascal Salin overlooks
this fact in his article “In Defense of Fractional Monetary Reserves,” pre-
sented at the Austrian Scholars Conference, March 30–31, 2001.
52As is logical, bankers always carried out their violations of general
legal principles and their misappropriations of money on demand
deposit in a secretive, disgraceful way. Indeed, they were fully aware of
the wrongful nature of their actions and furthermore, knew that if their
clients found out about their activities they would immediately lose
confidence in the bank and it would surely fail. This explains the exces-
sive secrecy traditionally present in banking. Together with the confus-
ing, abstract nature of financial transactions, this lack of openness
largely protects bankers from public accountability even today. It also
keeps most of the public in the dark as to the actual nature of banks.
While they are usually presented as true financial intermediaries, it
would be more accurate to see banks as mere creators of loans and
deposits which come out of nowhere and have an expansionary effect
on the economy. The disgraceful, and therefore secretive, nature of these
banking practices was skillfully revealed by Knut Wicksell in the fol-
lowing words:
BANKING IN FLORENCE IN THE FOURTEENTH CENTURY
Around the end of the twelfth and beginning of the thir-
teenth centuries, Florence was the site of an incipient banking
industry which gained great importance in the fourteenth cen-
tury. The following families owned many of the most impor-
tant banks: The Acciaiuolis, the Bonaccorsis, the Cocchis, the
Antellesis, the Corsinis, the Uzzanos, the Perendolis, the
Peruzzis, and the Bardis. Evidence shows that from the begin-
ning of the fourteenth century bankers gradually began to
make fraudulent use of a portion of the money on demand
deposit, creating out of nowhere a significant amount of
expansionary credit.53Therefore, it is not surprising that an
increase in the money supply (in the form of credit expansion)
caused an artificial economic boom followed by a profound,
inevitable recession. This recession was triggered not only by
Neapolitan princes’ massive withdrawal of funds, but also by
England’s inability to repay its loans and the drastic fall in the
70
Money, Bank Credit, and Economic Cycles
in effect, and contrary to the original plan, the banks became
credit institutions, instruments for increasing the supplies of
a medium of exchange, or for imparting to the total stock of
money, an increased velocity of circulation, physical or vir-
tual. Giro banking continued as before, though no actual
stock of money existed to correspond with the total of deposit
certificates. So long, however, as people continued to believe
that the existence of money in the banks was a necessary con-
dition of the convertibility of the deposit certificates, these
loans had to remain a profound secret. If they were discov-
ered the bank lost the confidence of the public and was
ruined, especially if the discovery was made at a time when
the Government was not in a position to repay the advances.
(Wicksell, Lectures on Political Economy, vol. 2, pp. 74–75)
53Various articles have been written on this topic. See the interesting one
by Reinhold C. Mueller, “The Role of Bank Money in Venice,
1300–1500,” in Studi Veneziani n.s. 3 (1979): 47–96, and chapter 5 of his
book, The Venetian Money Market. Carlo M. Cipolla, in his notable publi-
cation, The Monetary Policy of Fourteenth-Century Florence (Berkeley: Uni-
versity of California Press, 1982), p. 13, also affirms: “The banks of that
time had already developed to the point of creating money besides
increasing its velocity of circulation.”
price of Florentine government bonds. In Florence, public
debt had been financed by speculative new loans created out
of nowhere by Florentine banks. Ageneral crisis of confidence
occurred, causing all of the above banks to fail between 1341
and 1346. As could be expected, these bank failures were
detrimental to all deposit-holders, who, after a prolonged
period, received half, a third, or even a fifth of their deposits
at most.54Fortunately, Villani recorded the economic and
financial events of this period in a chronicle that Carlo M.
Cipolla has resurrected. According to Villani, the recession
was accompanied by a tremendous tightening of credit
(referred to descriptively as a mancamento della credenza, or
“credit shortage”), which further worsened economic condi-
tions and brought about a deluge of industry, workshop, and
business failures. Cipolla has studied this economic recession
in depth and graphically describes the transition from eco-
nomic boom to crisis and recession in this way: “The age of
‘The Canticle of the Sun’ gave way to the age of the Danse
macabre.”55In fact, according to Cipolla, the recession lasted
until, “thanks” to the devastating effects of the plague, which
radically diminished the population, the supply of cash and
credit money per capita approached its pre-crisis level and
laid the foundation for a subsequent recovery.56
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 71
54Cipolla, The Monetary Policy of Fourteenth-Century Florence, p. 9.
55Ibid., p. 1. See also Boccaccio’s commentary on the economic effects of
the plague, cited by John Hicks in Capital and Time: A Neo-Austrian The-
ory (Oxford: Clarendon Press, 1973), pp. 12–13; see footnote 60, chap. 5.
56Carlo M. Cipolla’s interpretive analysis of historical events reveals a
greater knowledge and application of economic theory than other
authors have displayed (such as A.P. Usher and Raymond de Roover,
who both express surprise at medieval economic recessions, the origins
of which are often “mysterious and inexplicable” to them). Still, his
analysis, monetarist in nature, focuses on the stages of recession, which
he attributes to a shortage of the money supply, resulting in turn from
an overall tightening of credit. Remarkably, he ignores the prior eco-
nomic boom, unconsciously lapsing into a “monetarist” interpretation
of history and thus failing to recognize the artificial boom caused by
credit expansion as the true source of the ensuing, inevitable recessions.
Cipolla’s thesis that it was the Black Death that eventually resolved the
THE MEDICI BANK
The history of the Medici Bank has come to light through
the research and determination of Raymond de Roover, whose
work was in turn advanced by the 1950 discovery of the
Medici Bank’s confidential ledgers (libri segreti) in Florence’s
Archivio di Stato.57The secrecy of these ledgers again betrays
the hidden, shameful nature of bankers’ activities (see footnote
52), as well as the desire of many customers of Italian banks
(nobles, princes, and even the Pope) to deposit their money in
secret accounts. The discovery of these bank books was indeed
fortunate, as they provide us with an in-depth understanding
of how the Medici Bank operated in the fifteenth century.
We must stress that the Medici Bank did not initially
accept demand deposits. At first it only took time deposits,
which were actually true loans from the customer to the bank.
These mutuum contracts were called depositi a discrezione. The
words a discrezione indicated that, as these supposed
“deposits” were really loans, the bank could make full use
of them and invest them freely, at least for the length of the
stipulated term.58Discrezione also referred to the interest the
72
Money, Bank Credit, and Economic Cycles
“shortage” of money is highly debatable, since money shortages tend to
correct themselves spontaneously through a general drop in prices (via
a corresponding increase in the value of money) which makes it unnec-
essary for individuals to maintain such high cash balances. There is no
need for a war or plague to decimate the population. Even if there had
been no plague, once the investment errors made during the boom had
been corrected, the process of economic decline would have ended
sooner or later, due to an increase in the value of money and a subse-
quent reduction in cash balances. This process undoubtedly coincided
with, yet occurred independently of the Black Death’s effects. Hence,
even the most educated and insightful historians, like Cipolla, clearly
make partial judgement errors in their interpretations when they do not
use the appropriate theoretical tools. At any rate, it is still very signifi-
cant that these defenders of an inflationary interpretation of history con-
tinue to point out the “positive effects” of wars and plagues and con-
sider them the key to recovery from economic crises.
57De Roover, The Rise and Decline of the Medici Bank, 1397–1494.
58
The Medici Bank and its subsidiaries also accepted deposits
from outsiders, especially great nobles, church dignitaries,
bank paid clients who loaned it money in the form of time
“deposits.”
In his book, Raymond de Roover performs a thorough,
detailed study of the development and vicissitudes of the
Medici Bank through the century of its existence. For our
purposes, it is only necessary to emphasize that at some point
the bank began to accept demand deposits and to use a por-
tion of them inappropriately as loans. The libri segreti docu-
ment this fact. The accounts for March 1442 accompany each
demand deposit entry with a note in the margin indicating the
likelihood that each depositor would claim his money.59
A balance sheet from the London branch of the Medici
Bank, dated November 12, 1477, shows that a significant
number of the bank’s debts corresponded to demand
deposits. Raymond de Roover himself estimates that at one
point, the bank’s primary reserves were down to 50 percent
of total demand liabilities.60If we apply the standard crite-
rion used by A.P. Usher, this implies a credit expansion ratio
of twice the demand deposits received by the bank. There is
evidence, however, that this ratio gradually worsened over
the bank’s life-span, especially after 1464, a year that marked
the beginning of growing difficulties for the bank. The roots
of the general economic and bank crisis that ruined the
Medici Bank resemble those Carlo M. Cipolla identifies in his
study of fourteenth-century Florence. As a matter of fact,
credit expansion resulting from bankers’ misappropriation of
demand deposits gave rise to an artificial boom fed by the
increase in the money supply and its seemingly “beneficial”
short-term effects. Nevertheless, since this process sprang
from an increase in the money supply, namely credit
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 73
condottieri, and political figures, such as Philippe de Com-
mines and Ymbert de Batarnay. Such deposits were not usu-
ally payable on demand but were either explicitly or implic-
itly time deposits on which interest, or rather discrezione,
was paid. (De Roover, The Rise and Decline of the Medici Bank
1397–1494, p. 101)
59Ibid., p. 213.
60Ibid., p. 245.
unbacked by growth in real savings, the reversal of the
process was inevitable, as chapters 4 and following will
explain in detail. This is exactly what happened in Italy’s large
business centers in the second half of the fifteenth century. In
terms of economic analysis, Raymond de Roover’s grasp of
the historical process is unfortunately even shallower than
Cipolla’s, and he even goes so far as to state, “what caused
these general crises remains a mystery.”61 However, it is not
surprising that the Medici Bank eventually failed, as did the
other banks that depended on fractional-reserve banking for a
large part of their business. Though Raymond de Roover
claims he does not understand what caused the general crisis
at the end of the fifteenth century, his blow-by-blow historical
account of the final stage of the Medici Bank reflects all of the
typical indications of an inescapable recession and credit
squeeze following a process of great artificial credit expan-
sion. De Roover explains that the Medicis were forced to
adopt a policy of credit restriction. They demanded the repay-
ment of loans and attempted to increase the bank’s liquidity.
Moreover, it has been demonstrated that in its final stage the
Medici Bank was operating with a very low reserve ratio,
which even dropped below 10 percent of total assets and was
therefore inadequate to meet the bank’s obligations during the
recession period.62The Medici Bank eventually failed and all
74
Money, Bank Credit, and Economic Cycles
61Ibid., p. 239.
62Hence, over the bank’s lifespan, its owners gradually increased their
violations of the traditional legal principle requiring them to maintain
possession of 100 percent of demand deposits, and their reserve ratio
continuously decreased:
A perusal of the extant balance sheets reveals another signifi-
cant fact: the Medici Bank operated with tenuous cash
reserves which were usually well below 10 percent of total
assets. It is true that this is a common feature in the financial
statements of medieval merchant-bankers, such as Francesco
Datini and the Borromei of Milan. The extent to which they
made use of money substitutes is always a surprise to mod-
ern historians. Nevertheless, one may raise the question
whether cash reserves were adequate and whether the Medici
Bank was not suffering from lack of liquidity. (Ibid., p. 371)
of its assets fell into the hands of its creditors. The bank’s com-
petitors failed for the same reasons: the unavoidable effects of
the artificial expansion and subsequent economic recession
invariably generated by the violation of the traditional legal
principles governing the monetary irregular deposit.
BANKING IN CATALONIA IN THE FOURTEENTH AND FIFTEENTH
CENTURIES: THE TAULA DE CANVI
The emergence of private banks in Barcelona coincided
with the development of private banking in large Italian busi-
ness centers. During the reign of Jaime I, the Conqueror,
(1213–1276), the Gothic and Roman laws governing business
were repealed and replaced by the Usos de Barcelona. In addi-
tion, a thorough, detailed set of regulations to control banking
was established by the Cortes of 1300–1301. It set down the
powers, rights, and responsibilities of bankers, and stipulated
requirements with respect to guarantors. Some of the rules
adopted are quite relevant to our topic.
For example, on February 13, 1300 it was established that
any banker who went bankrupt would be vilified throughout
Barcelona by a public spokesman and forced to live on a strict
diet of bread and water until he returned to his creditors the
full amount of their deposits.63Furthermore, on May 16, 1301,
one year later, it was decided that bankers would be obliged
to obtain collateral or guarantees from third parties in order to
operate, and those who did not would not be allowed to
spread a tablecloth over their work counter. The purpose was
to make clear to everyone that these bankers were not as sol-
vent as those using tablecloths, who were backed by collateral.
Any banker who broke this rule (i.e., operated with a table-
cloth but without collateral) would be found guilty of fraud.64
In view of these regulations, Barcelona’s banking system must
initially have been quite solvent and banks must have largely
respected the essential legal principles governing the mone-
tary bank deposit.
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 75
63Usher, The Early History of Deposit Banking in Mediterranean Europe, p.
239.
64Ibid., p. 239.
Nevertheless, there are indications to show that, in spite of
everything, private bankers soon began to deceive their
clients, and on August 14, 1321 the regulations pertaining to
bank failures were modified. It was established that those
bankers who did not immediately fulfill their commitments
would be declared bankrupt, and if they did not pay their
debts within one year, they would fall into public disgrace,
which would be proclaimed throughout Catalonia by a town
crier. Immediately afterward, the banker would be beheaded
directly in front of his counter, and his property sold locally to
pay his creditors. In fact, this is one of the few historical
instances in which public authorities have bothered to effec-
tively defend the general principles of property rights with
respect to the monetary bank-deposit contract. While it is
likely that most Catalonian bankers who went bankrupt tried
to escape or pay their debts within a year, documentary evi-
dence shows that at least one banker, a certain Francesch
Castello, was beheaded directly in front of his counter in 1360,
in strict accordance with the law.65
Despite these sanctions, banks’ liquid funds did not match
the amount received on demand deposit. As a result, they
eventually failed en masse in the fourteenth century, during
the same economic and credit recession that ravaged the Ital-
ian financial world and was studied by Carlo M. Cipolla.
Though there are signs that Catalonian banks held out a bit
longer than Italian ones (the terrible penalties for fraud
undoubtedly raised reserve ratios), documents show that in
the end, Catalonian banks also generally failed to meet their
obligations. In March 1397, further regulations were intro-
duced when the public began to complain that bankers were
reluctant to return money deposited, offered their clients all
76
Money, Bank Credit, and Economic Cycles
65Ibid., pp. 240 and 242. In light of recent scandals and bank crises in
Spain, one could jokingly wonder if it might not be a good idea to again
punish fraudulent bankers as severely as in fourteenth-century Catalo-
nia. A student of ours, Elena Sousmatzian, says that in the recent bank
crisis that devastated Venezuela, a senator from the Social-Christian
Party Copei even “seriously” suggested such measures in a statement to
the press. Incidentally, her remarks were quite well-received among
depositors affected by the crisis.
sorts of excuses, told them to “come back later” and would
pay them (in the end, if the clients were lucky) only in small
coins of little value and never in the gold which had originally
been deposited.66
The bank crisis of the fourteenth century did not lead to
increased monitoring and protection of the property rights of
depositors. Instead, it resulted in the creation of a municipal
government bank, the Taula de Canvi, Barcelona’s Bank of
Deposit. This bank was formed with the purpose of taking in
deposits and using them to finance city expenditures and the
issuance of government bond certificates for the city of
Barcelona. Hence, the Taula de Canvi fits the traditional model
of a bank created by public authorities to take direct advan-
tage of the dishonest profits of banking. A.P. Usher studied the
life of this bank in detail. Predictably, it ended up suspending
payments (in February 1468), because a large portion of its
reserves had been channeled into loans to the city of Barcelona
and the bank was unable to satisfy depositors’ demands for
cash withdrawals.67From that point on, the bank was reor-
ganized and gradually given more and more privileges, such
as a monopoly on all deposits deriving from judicial attach-
ments and seizures. This was an almost guaranteed source of
continuous income and acted as collateral for loans to finance
the city’s projects. The Taula was also granted a monopoly on
resources from all administrative deposits, guardianships and
testate proceedings. These funds were deposited and fixed in
the bank.68
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 77
66Ibid., p. 244.
67
In February 1468, after a long period of strain, the Bank of
Deposit was obliged to suspend specie payments completely.
For all balances on the books at that date, annuities bearing
interest at 5 percent were issued to depositors willing to
accept them. Those unwilling to accept annuities remained
creditors of the bank, but they were not allowed to withdraw
funds in cash. (Ibid., p. 278)
68Documents show that in 1433, at least 28 percent of deposits in
Barcelona’s Taula de Canvi came from compulsory judicial seizures and
were very stable. See Usher, The Early History of Deposit Banking in
Mediterranean Europe, p. 339, and Kindleberger, A Financial History of
most of its trade and the feudalization of economic and social
relationships. The enormous reduction in trade and in the
division of labor dealt a definitive blow to financial activities,
especially banking. The effects of this reduction lasted several
centuries. Only monasteries, secure centers of economic and
social development, could serve as guardians of economic
resources. It is important to mention the activity in this field of
the Templars, whose order was founded in 1119 in Jerusalem
to protect pilgrims. The Templars possessed significant finan-
cial resources obtained as plunder from their military cam-
paigns and as bequests from feudal princes and lords. As they
were active internationally (they had more than nine thousand
centers and two headquarters) and were a military and reli-
gious order, the Templars were safe custodians for deposits
and had great moral authority, earning them the trust of the
people. Understandably, they began to receive both regular
and irregular deposits from individuals, to whom they
charged a fee for safekeeping. The Templars also carried out
transfers of funds, charging a set amount for transportation
and protection. Moreover, they made loans of their own
resources and did not violate the safekeeping principle on
demand deposits. The order acquired a growing prosperity
which aroused the fear and envy of many people, until Philip
the Fair, the King of France, decided to dissolve it. He con-
demned those in charge to be burned at the stake (including
Jacques de Molay, the Grand Maître), with the prime objective
of appropriating all of the order’s riches.37
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 59
37See, for example, Jules Piquet’s book, Des banquiers au Moyen Age: Les
Templiers, Étude de leurs opérations financièrs (Paris, 1939), cited by
Henri Pirenne in his work, Histoire Économique et Sociale Du Moyen Age
(Paris: Presses Universitaires de France, 1969), pp. 116 and 219. Piquet
believes he sees the beginnings of double-entry bookkeeping and even
a primitive form of check in the records kept by the Templars. How-
ever, it appears the Templars’ accounting practices were, at most, mere
direct predecessors of double-entry bookkeeping, later formalized in
The end of the eleventh century and beginning of the
twelfth brought a moderate resurgence of business and trade,
mainly among the Italian cities on the Adriatic (especially
Venice), Pisa, and later, Florence. These cities specialized in
trade with Constantinople and the Orient. Significant financial
growth in these cities led to the revival of banking, and the pat-
tern we observed in the classical world was reproduced.
Indeed, bankers at first respected the juridical principles passed
down from Rome and conducted their business lawfully, avoid-
ing illicit use of demand deposits (i.e., irregular deposits of
money). Only money received as loans (i.e., time “deposits”)
was used or lent by bankers, and only during the agreed-upon
term.38Nevertheless, bankers again became tempted to take
advantage of money from demand deposits. This was a gradual
process which led to abuses and the resumption of fractional-
reserve banking. The authorities were generally unable to
enforce legal principles and on many occasions even granted
privileges and licenses to encourage bankers’ improper activity
and derive benefits from it, in the shape of loans and tax rev-
enues. They even created government banks (such as
60
Money, Bank Credit, and Economic Cycles
1494 by Luca Pacioli, the great Venetian monk and friend of Leonardo
da Vinci. A bank in Pisa used double-entry bookkeeping as early as
1336, as did the Masari family (tax collectors in Genoa) in 1340. The
oldest European account book we have evidence of came from a Flo-
rentine bank and dates back to 1211. See G.A. Lee, “The Oldest Euro-
pean Account Book: A Florentine Bank Ledger of 1211,” in Accounting
History: Some British Contributions, R.H. Parker and B.S. Yamey, eds.
(Oxford: Clarendon Press, 1994), pp. 160–96.
38
In theory at least, early banks of deposit were not discount
or lending banks. They did not create money but served a
system of 100 percent reserves, such as some monetarists
today would like to see established. Overdrafts were forbid-
den. In practice, the standards proved difficult to maintain,
especially in face of public emergency. The Taula de Valen-
cia was on the verge of using its deposited treasure to buy
wheat for the city in 1567. Illegal advances were made to city
officials in 1590 and illegal loans to the city itself on a num-
ber of occasions. (Charles P. Kindleberger, A Financial His-
tory of Western Europe, 2nd ed. [Oxford: Oxford University
Press, 1993], p. 49)
Barcelona’s Bank of Deposit, or Taula de Canvi, and others we
will consider later).39
THE REVIVAL OF DEPOSIT BANKING IN MEDITERRANEAN EUROPE
Abbott Payson Usher, in his monumental work, The Early
History of Deposit Banking in Mediterranean Europe,40studies the
gradual emergence of fractional-reserve banking during the
late Middle ages, a process founded on the violation of this
general legal principle: full availability of the tantundem must
be preserved in favor of the depositor. According to Usher, it
is not until the thirteenth century that some private bankers
begin to use the money of their depositors to their own advan-
tage, giving rise to fractional-reserve banking and the oppor-
tunities for credit expansion it entails. Moreover, and contrary
to a widely-held opinion, Usher believes this to be the most
significant event in the history of banking, rather than the
appearance of banks of issue (which in any case did not occur
until much later, in the late seventeenth century). As we will
see in chapter 4, although exactly the same economic effects
result from the issuance of bank notes without financial back-
ing and the loaning of funds from demand deposits, banking
was historically shaped more by the latter of these practices
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 61
39Islamic law also banned bankers’ personal use of irregular deposits
throughout the medieval period, especially on the Iberian Peninsula.
See, for instance, the Compendio de derecho islámico (Risála, Fí-l-Fiqh), by
the tenth-century Hispano-Arabic jurist Ibn Abí Zayd, called Al-
Qayrawání, published with the support of Jesús Riosalido (Madrid: Edi-
torial Trotta, 1993). On p. 130 we find the following statement of a juridi-
cal principle: “he who uses a money deposit to do business commits a
reprehensible act, but if he uses his own money, he may keep the profit.”
(See also pp. 214–15, where it is stipulated that, in the case of a true loan
or mutuum, the lender may not withdraw the money at will, but only at
the end of the agreed-upon term; the Islamic legal concept of money
deposit closely parallels that of the Roman irregular deposit.)
40Abbott Payson Usher taught economics at Harvard University and
authored the celebrated work, The Early History of Deposit Banking in
Mediterranean Europe (Cambridge, Mass.: Harvard University Press,
1943).
than by the former. Usher states that: “the history of banks of
issue has, until lately, obscured the importance of due deposit
banking in all its forms, whether primitive or modern.” In an
ironic reference to the undue importance given by economists
to the problems of banks of issue versus the older but equally
harmful activities of deposit banks, he concludes that:
the demand for currency, and the theoretical interests cre-
ated by the problem, did much to foster misconceptions on
the relative importance of notes and deposits. Just as French
diplomats “discovered” the Pyrenees in the diplomatic cri-
sis of the eighteenth century, so banking theorists “discov-
ered” deposits in the mid-nineteenth century.41
Again and again, Usher shows that the modern banking
system arose from fractional-reserve banking (itself the result of
fraud and government complicity, as Usher illustrates in detail
via the example of the late medieval Catalonian banking sys-
tem), and not from banks of issue, which appeared much later.
Usher points out that the first banks in twelfth-century
Genoa made a clear distinction in their books between demand
deposits and “time” deposits, and recorded the latter as loans
or mutuum contracts.42However, bankers later began gradu-
ally to make self-interested use of demand deposits, giving rise
to expansionary capabilities present in the banking system;
more specifically, the power to create deposits and grant cred-
its out of nowhere. Barcelona’s Bank of Deposit is a case in
point. Usher estimates that the bank’s cash reserves amounted
to 29 percent of total deposits. This meant their capacity for
credit expansion was 3.3 times their cash reserves.43
62
Money, Bank Credit, and Economic Cycles
41Ibid., pp. 9 and 192.
42“In all these Genoese registers there is also a series of instruments in
which the money received is explicitly described as a loan (mutuum).”
Ibid., p. 63.
43
Against these liabilities, the Bank of Deposit held reserves in
specie amounting to 29 percent of the total. Using the phrase-
ology of the present time, the bank was capable of extending
credit in the ratio of 3.3 times the reserves on hand. (Ibid., p.
181)
Usher also highlights the failure of public officials at dif-
ferent levels to enforce sound banking practices, particularly a
100-percent reserve requirement on demand deposits. More-
over, the authorities ended up granting banks a government
license (a privilege—ius privilegium) to operate with a frac-
tional reserve. Banks were nevertheless required to guarantee
deposits.44At any rate, rulers were usually the first to take
advantage of fraudulent banking, finding loans an easy source
of public financing. It is as if bankers were granted the privi-
lege of making gainful use of their depositors’ money in
return for their unspoken agreement that most of such use be
in the shape of loans to public officials and funding for the
government. On various occasions, rulers went so far as to
create government banks, in order to directly reap the consid-
erable profits available in banking. As we will see, Barcelona’s
Bank of Deposit, the Taula de Canvi, was created with this main
objective.
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 63
However, we cannot agree with the statement Usher makes immedi-
ately afterward; he contends that private banks also operating in
Barcelona at the time must have had a much lower reserve ratio. Quite
the opposite must have been true. As private banks were smaller, they
would not have inspired as much confidence in the public as the munic-
ipal bank did, and as they operated in a strictly competitive environ-
ment, their cash reserves must have been higher (see pp. 181–82 of
Usher’s book). In any case, Usher concludes that
there was considerable centralization of clearance in the early
period and extensive credit creation. In the absence of com-
prehensive statistical records, we have scarcely any basis for
an estimate of the quantitative importance of credit in the
medieval and early modern periods, though the implications
of our material suggest an extensive use of credit purchasing
power. (Ibid., pp. 8–9)
We will later cite works by C. Cipolla, which fully confirm Usher’s main
thesis. In chapter 4 we will examine bank multipliers in depth.
44In fifteenth-century Catalonia, guarantees were not required, though
only bankers who offered them were allowed to spread tablecloths over
their counters. By this system, the public could easily identify the more
solvent businesses. Ibid., p. 17.
THE CANONICAL BAN ON USURY AND THE
“DEPOSITUM CONFESSATUM”
The ban on usury by the three major monotheistic reli-
gions (Judaism, Islam and Christianity) did much to compli-
cate and obscure medieval financial practices. Marjorie Grice-
Hutchinson has carefully studied the medieval prohibition of
interest and its implications.45She points out that Jews were
not forbidden to loan money at interest to Gentiles, which
explains why, at least during the first half of the medieval
period, most bankers and financiers in the Christian world
were Jewish.46
This canonical ban on interest added greatly to the intrica-
cies of medieval banking, though not (as many theorists have
insisted) because bankers, in their attempt to offer a useful,
necessary service, were forced to constantly search for new
ways to disguise the necessary payment of interest on loans.
When bankers loaned money received from clients as a loan
(or “time” deposit), they were acting as true financial inter-
mediaries and were certainly doing a legitimate business and
significantly contributing to the productive economy of their
time. Still, the belated recognition by the Church of the legiti-
macy of interest should not be regarded as overall approval of
the banking business, but only as authorization for banks to
loan money lent to them by third parties. In other words, to
64
Money, Bank Credit, and Economic Cycles
45Marjorie Grice-Hutchinson, Early Economic Thought in Spain 1177–
1740 (London: George Allen and Unwin, 1978). See “In Concealment of
Usury,” chap. 1, pp. 13–60.
46
Until the thirteenth century, the greater part of financial activ-
ity was in the hands of Jews and other non-Christians, usually
from the Near East. For such unbelievers from the Christian
point of view there could be no salvation in any event, and
the economic prohibitions of the Church did not apply to
them. . . . Hatred for the Jews arose on the part of the people
who resented such interest rates, while monarchs and
princes, if less resentful, scented profits from expropriation of
this more or less helpless group. (Harry Elmer Barnes, An Eco-
nomic History of the Western World [New York: Harcourt, Brace
and Company, 1940], pp. 192–93)
act as mere financial intermediaries. The evolution of Church
doctrine on interest in no way implies a sanction of fractional-
reserve banking, i.e., bankers’ self-interested use (which usu-
ally means granting loans) of demand deposits.47
To a great extent, the conceptual confusion we are dealing
with arose in the Middle Ages as a result of the canonical ban
on interest. One of the main artifices48devised by economic
agents to conceal actual interest-paying loans was to disguise
them as demand deposits. Let us see how they did it. First, we
must think back to our discussion of the monetary irregular-
deposit contract in chapter 1. One of the most notable guide-
lines found for this contract in the Corpus Juris Civilis stipu-
lated that, if the depositary were unable to return the deposit
on demand, not only was he guilty of theft for misappropria-
tion, but he was also obliged to pay interest to the depositor
for his delay in repayment (Digest, 16, 3, 25, 1). Hence, it
should come as no surprise that throughout the Middle Ages,
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 65
47This is precisely the opinion held by Father Bernard W. Dempsey S.J.,
who concludes in his remarkable book Interest and Usury (Washington,
D.C.: American Council of Public Affairs, 1943) that even if we accept
interest as legitimate, fractional-reserve banking amounts to “institu-
tional usury” and is especially harmful to society, since it repeatedly
generates artificial booms, bank crises and economic recessions (p.
228).
48A clear, concise list of the tricks used to systematically disguise loans
and interest can be found in Imbert’s book, Historia económica (de los orí-
genes a 1789), pp. 157–58. Imbert mentions the following methods of
concealing interest-bearing loans: (a) bogus contracts (such as repur-
chase agreements or real estate guarantees); (b) penalty clauses (dis-
guising interest as economic sanctions); (c) lying about the amount of
the loan (the borrower agreed to repay a sum higher than the actual
loan); (d) foreign exchange transactions (which included the interest as
an additional charge); and (e) income or annuities (life annuities includ-
ing a portion of both the interest and the repayment of the principal).
Jean Imbert makes no express mention of the depositum confessatum, one
of the most popular ways of justifying interest. It fits well into the
“penalty clauses” category. See also the reference Henri Pirenne makes
to the “utmost ingenuity” used to conceal “dangerous interest.” Eco-
nomic and Social History of Medieval Europe (London: Kegan Paul, Trench,
Trubner and Company, 1947), p. 140.
in order to circumvent the canonical ban on interest, many
bankers and “depositors” expressly declared that they had taken
part in a monetary irregular-deposit contract, when they had
actually formalized a true loan or mutuum contract. The
method of concealment to which this declaration belonged was
aptly named depositum confessatum. It was a simulated deposit
which, despite the declarations of the two parties, was not a
true deposit at all, but rather a mere loan or mutuum contract.
At the end of the agreed-upon term, the supposed depositor
claimed his money. When the professed depositary failed to
return it, he was forced to pay a “penalty” in the shape of inter-
est on his presumed “delay,” which had nothing to do with the
actual reason for the “penalty” (the fact that the operation was
a loan). Disguising loans as deposits became an effective way
to get around the canonical ban on interest and escape severe
sanctions, both secular and spiritual.
The depositum confessatum eventually perverted juridical
doctrine on the monetary irregular deposit, robbing these
tenets of the clarity and purity they received in classical Rome
and adding confusion that has persisted almost to the present
day. In fact, regardless of experts’ doctrinal stand (either
strictly against, or “in favor” within reasonable limits) on
interest-bearing loans, the different approaches to the deposi-
tum confessatum led theorists to stop distinguishing clearly
between the monetary irregular deposit and the mutuum con-
tract. On one hand, over-zealous canonists, determined to
expose all hidden loans and condemn the corresponding
interest, tended to automatically equate deposit contracts with
mutuum contracts. They believed that by exposing the loan
they assumed was behind every deposit they would put an
end to the pretense of the depositum confessatum. This is pre-
cisely where their error lay: they regarded all deposits, even
actual ones (made with the essential purpose of safeguarding
the tantundem and keeping it always available to the deposi-
tor) as deposita confessata. On the other hand, those experts
who were relatively more supportive of loans and interest and
searched for ways to make them acceptable to the Church,
defended the depositum confessatum as a kind of precarious
loan which, according to the principles embodied in the
Digest, justified the payment of interest.
66
Money, Bank Credit, and Economic Cycles
As a result of both doctrinal stances, scholars came to
believe that the “irregularity” in the monetary irregular
deposit referred not to the deposit of a certain quantity of a
fungible good (the units of which were indistinguishable from
others of the same type and the tantundem of which was to be
kept continually available to the depositor), but rather to the
irregularity of always disguising loans as deposits.49Further-
more, bankers, who had used the depositum confessatum to dis-
guise loans as deposits and to justify the illegal payment of
interest, eventually realized that the doctrine which held that
deposits always concealed loans could also be extremely prof-
itable to them, because they could employ it to defend even
the misappropriation of money which had actually been
placed into demand deposits and had not been loaned. Thus,
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 67
49Canonists’ equation of the monetary irregular deposit with the
mutuum or loan contract led experts to search for a common juridical
feature between the two contracts. They soon realized that in the deposit
of a fungible good, “ownership” of the individual units deposited is
“transferred,” since the depositary is only obliged to safeguard, main-
tain, and return upon demand the tantundem. This transfer of ownership
appears to coincide with that of the loan or mutuum contract, so it was
natural for scholars to automatically assume that all monetary irregular
deposits were loans, since both include a “transfer” of “ownership” from
the depositor to the depositary. Hence, theorists overlooked the essential
difference (see chapter 1) between the monetary irregular deposit and
the mutuum or loan: the main purpose of the irregular deposit is the cus-
tody and safekeeping of the good, and while “ownership” is in a sense
“transferred,” availability is not, and the tantundem must be kept contin-
ually available to the depositor. In contrast, a loan entails the transfer of
full availability, apart from ownership (in fact, present goods are
exchanged for future goods) and involves this fundamental element: a
term during which the goods cease to be available to the lender. Irregu-
lar deposits do not include such a term. In short, since the canonical pro-
hibition of interest gave rise to the fraudulent and spurious institution of
the depositum confessatum, it was indirectly responsible for the loss of clar-
ity in the distinction between the monetary irregular deposit and the
mutuum. This confusion is clearly behind the wrong 1342 final court
decision on the Isabetta Querini vs. The Bank of Marino Vendelino case, men-
tioned by Reinhold C. Mueller in The Venetian Money Market: Banks, Pan-
ics, and the Public Debt, 1200–1500 (Baltimore: Johns Hopkins University
Press, 1997), pp. 12–13.
the canonical ban on interest had the unexpected effect of
obscuring Roman jurists’ clear, legal definition of the mone-
tary irregular-deposit contract. Many capitalized on the ensu-
ing confusion in an attempt to legally justify fraudulent bank-
ing and the misappropriation of demand deposits. Experts
failed to clear up the resulting legal chaos until the end of the
nineteenth century.50
Let us now examine three particular cases which together
illustrate the development of medieval banking: Florentine
banks in the fourteenth century; Barcelona’s Bank of Deposit,
the Taula de Canvi, in the fifteenth century and later; and the
Medici Bank. These banks, like all of the most important
banks in the late Middle Ages, consistently displayed the pat-
tern we saw in Greece and Rome: banks initially respected the
traditional legal principles found in the Corpus Juris Civilis,
i.e., they operated with a 100-percent reserve ratio which
guaranteed the safekeeping of the tantundem and its constant
availability to the depositor. Then, gradually, due to bankers’
greed and rulers’ complicity, these principles began to be vio-
lated, and bankers started to loan money from demand
68
Money, Bank Credit, and Economic Cycles
50In fact, Pasquale Coppa-Zuccari, whose work we have already cited, was
the first to begin to reconstruct the complete legal theory of the monetary
irregular deposit, starting from the same premise as the classical Roman
scholars and again revealing the illegitimacy of banks’ misappropriation of
demand deposits. Regarding the effects of the depositum confessatum on
the theoretical treatment of the juridical institution of irregular deposit,
Coppa-Zuccari concludes that
le condizioni legislative dei tempi rendevano fertile il terreno
in cui il seme della discordia dottrinale cadeva. Il divieto
degli interessi nel mutuo non valeva pel deposito irregolare.
Qual meraviglia dunque se chi aveva denaro da impiegare
fruttuosamente lo desse a deposito irregolare, confessatum se
occorreva, e non a mutuo? Quel divieto degli interessi, che
tanto addestrò il commercio a frodare la legge e la cui effica-
cia era nulla di fronte ad un mutuo dissimulato, conservò in
vita questo ibrido instituto, e fece sì che il nome di deposito
venissi imposto al mutuo, che non poteva chiamarsi col pro-
prio nome, perchè esso avrebbe importato la nullità del patto
relativo agli interessi. (Coppa-Zuccari, Il deposito irregolare,
pp. 59–60)
deposits, often, in fact, to rulers. This gave rise to fractional-
reserve banking and artificial credit expansion, which in the
first stage appeared to spur strong economic growth. The
whole process ended in a general economic crisis and the fail-
ure of banks that could not return deposits on demand once
the recession hit and they had lost the trust of the public.
Whenever loans were systematically made from demand
deposits, the historical constant in banking appears to have
been eventual failure.51 Furthermore, bank failures were
accompanied by a strong contraction in the money supply
(specifically, a shortage of loans and deposits) and by the
resulting inevitable economic recession. As we will see in the
following chapters, it took economic scholars nearly five cen-
turies to understand the theoretical causes of all of these
processes.52
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 69
51For example, Raymond Bogaert mentions that of the 163 known banks
in Venice, documentary evidence exists to show that at least 93 of them
failed. Bogaert, Banques et banquiers dans les cités grecques, note 513, p.
392. A detailed list of 46 failures of deposit banks in Venice can also be
seen in Mueller, The Venetian Money Market, pp. 585–86. This same fate
of failures affected all banks in Seville in the 15th century. Hence, the
systematic failure of fractional-reserve private banks not supported by
a central bank (or equivalent) is a fact of history. Pascal Salin overlooks
this fact in his article “In Defense of Fractional Monetary Reserves,” pre-
sented at the Austrian Scholars Conference, March 30–31, 2001.
52As is logical, bankers always carried out their violations of general
legal principles and their misappropriations of money on demand
deposit in a secretive, disgraceful way. Indeed, they were fully aware of
the wrongful nature of their actions and furthermore, knew that if their
clients found out about their activities they would immediately lose
confidence in the bank and it would surely fail. This explains the exces-
sive secrecy traditionally present in banking. Together with the confus-
ing, abstract nature of financial transactions, this lack of openness
largely protects bankers from public accountability even today. It also
keeps most of the public in the dark as to the actual nature of banks.
While they are usually presented as true financial intermediaries, it
would be more accurate to see banks as mere creators of loans and
deposits which come out of nowhere and have an expansionary effect
on the economy. The disgraceful, and therefore secretive, nature of these
banking practices was skillfully revealed by Knut Wicksell in the fol-
lowing words:
BANKING IN FLORENCE IN THE FOURTEENTH CENTURY
Around the end of the twelfth and beginning of the thir-
teenth centuries, Florence was the site of an incipient banking
industry which gained great importance in the fourteenth cen-
tury. The following families owned many of the most impor-
tant banks: The Acciaiuolis, the Bonaccorsis, the Cocchis, the
Antellesis, the Corsinis, the Uzzanos, the Perendolis, the
Peruzzis, and the Bardis. Evidence shows that from the begin-
ning of the fourteenth century bankers gradually began to
make fraudulent use of a portion of the money on demand
deposit, creating out of nowhere a significant amount of
expansionary credit.53Therefore, it is not surprising that an
increase in the money supply (in the form of credit expansion)
caused an artificial economic boom followed by a profound,
inevitable recession. This recession was triggered not only by
Neapolitan princes’ massive withdrawal of funds, but also by
England’s inability to repay its loans and the drastic fall in the
70
Money, Bank Credit, and Economic Cycles
in effect, and contrary to the original plan, the banks became
credit institutions, instruments for increasing the supplies of
a medium of exchange, or for imparting to the total stock of
money, an increased velocity of circulation, physical or vir-
tual. Giro banking continued as before, though no actual
stock of money existed to correspond with the total of deposit
certificates. So long, however, as people continued to believe
that the existence of money in the banks was a necessary con-
dition of the convertibility of the deposit certificates, these
loans had to remain a profound secret. If they were discov-
ered the bank lost the confidence of the public and was
ruined, especially if the discovery was made at a time when
the Government was not in a position to repay the advances.
(Wicksell, Lectures on Political Economy, vol. 2, pp. 74–75)
53Various articles have been written on this topic. See the interesting one
by Reinhold C. Mueller, “The Role of Bank Money in Venice,
1300–1500,” in Studi Veneziani n.s. 3 (1979): 47–96, and chapter 5 of his
book, The Venetian Money Market. Carlo M. Cipolla, in his notable publi-
cation, The Monetary Policy of Fourteenth-Century Florence (Berkeley: Uni-
versity of California Press, 1982), p. 13, also affirms: “The banks of that
time had already developed to the point of creating money besides
increasing its velocity of circulation.”
price of Florentine government bonds. In Florence, public
debt had been financed by speculative new loans created out
of nowhere by Florentine banks. Ageneral crisis of confidence
occurred, causing all of the above banks to fail between 1341
and 1346. As could be expected, these bank failures were
detrimental to all deposit-holders, who, after a prolonged
period, received half, a third, or even a fifth of their deposits
at most.54Fortunately, Villani recorded the economic and
financial events of this period in a chronicle that Carlo M.
Cipolla has resurrected. According to Villani, the recession
was accompanied by a tremendous tightening of credit
(referred to descriptively as a mancamento della credenza, or
“credit shortage”), which further worsened economic condi-
tions and brought about a deluge of industry, workshop, and
business failures. Cipolla has studied this economic recession
in depth and graphically describes the transition from eco-
nomic boom to crisis and recession in this way: “The age of
‘The Canticle of the Sun’ gave way to the age of the Danse
macabre.”55In fact, according to Cipolla, the recession lasted
until, “thanks” to the devastating effects of the plague, which
radically diminished the population, the supply of cash and
credit money per capita approached its pre-crisis level and
laid the foundation for a subsequent recovery.56
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 71
54Cipolla, The Monetary Policy of Fourteenth-Century Florence, p. 9.
55Ibid., p. 1. See also Boccaccio’s commentary on the economic effects of
the plague, cited by John Hicks in Capital and Time: A Neo-Austrian The-
ory (Oxford: Clarendon Press, 1973), pp. 12–13; see footnote 60, chap. 5.
56Carlo M. Cipolla’s interpretive analysis of historical events reveals a
greater knowledge and application of economic theory than other
authors have displayed (such as A.P. Usher and Raymond de Roover,
who both express surprise at medieval economic recessions, the origins
of which are often “mysterious and inexplicable” to them). Still, his
analysis, monetarist in nature, focuses on the stages of recession, which
he attributes to a shortage of the money supply, resulting in turn from
an overall tightening of credit. Remarkably, he ignores the prior eco-
nomic boom, unconsciously lapsing into a “monetarist” interpretation
of history and thus failing to recognize the artificial boom caused by
credit expansion as the true source of the ensuing, inevitable recessions.
Cipolla’s thesis that it was the Black Death that eventually resolved the
THE MEDICI BANK
The history of the Medici Bank has come to light through
the research and determination of Raymond de Roover, whose
work was in turn advanced by the 1950 discovery of the
Medici Bank’s confidential ledgers (libri segreti) in Florence’s
Archivio di Stato.57The secrecy of these ledgers again betrays
the hidden, shameful nature of bankers’ activities (see footnote
52), as well as the desire of many customers of Italian banks
(nobles, princes, and even the Pope) to deposit their money in
secret accounts. The discovery of these bank books was indeed
fortunate, as they provide us with an in-depth understanding
of how the Medici Bank operated in the fifteenth century.
We must stress that the Medici Bank did not initially
accept demand deposits. At first it only took time deposits,
which were actually true loans from the customer to the bank.
These mutuum contracts were called depositi a discrezione. The
words a discrezione indicated that, as these supposed
“deposits” were really loans, the bank could make full use
of them and invest them freely, at least for the length of the
stipulated term.58Discrezione also referred to the interest the
72
Money, Bank Credit, and Economic Cycles
“shortage” of money is highly debatable, since money shortages tend to
correct themselves spontaneously through a general drop in prices (via
a corresponding increase in the value of money) which makes it unnec-
essary for individuals to maintain such high cash balances. There is no
need for a war or plague to decimate the population. Even if there had
been no plague, once the investment errors made during the boom had
been corrected, the process of economic decline would have ended
sooner or later, due to an increase in the value of money and a subse-
quent reduction in cash balances. This process undoubtedly coincided
with, yet occurred independently of the Black Death’s effects. Hence,
even the most educated and insightful historians, like Cipolla, clearly
make partial judgement errors in their interpretations when they do not
use the appropriate theoretical tools. At any rate, it is still very signifi-
cant that these defenders of an inflationary interpretation of history con-
tinue to point out the “positive effects” of wars and plagues and con-
sider them the key to recovery from economic crises.
57De Roover, The Rise and Decline of the Medici Bank, 1397–1494.
58
The Medici Bank and its subsidiaries also accepted deposits
from outsiders, especially great nobles, church dignitaries,
bank paid clients who loaned it money in the form of time
“deposits.”
In his book, Raymond de Roover performs a thorough,
detailed study of the development and vicissitudes of the
Medici Bank through the century of its existence. For our
purposes, it is only necessary to emphasize that at some point
the bank began to accept demand deposits and to use a por-
tion of them inappropriately as loans. The libri segreti docu-
ment this fact. The accounts for March 1442 accompany each
demand deposit entry with a note in the margin indicating the
likelihood that each depositor would claim his money.59
A balance sheet from the London branch of the Medici
Bank, dated November 12, 1477, shows that a significant
number of the bank’s debts corresponded to demand
deposits. Raymond de Roover himself estimates that at one
point, the bank’s primary reserves were down to 50 percent
of total demand liabilities.60If we apply the standard crite-
rion used by A.P. Usher, this implies a credit expansion ratio
of twice the demand deposits received by the bank. There is
evidence, however, that this ratio gradually worsened over
the bank’s life-span, especially after 1464, a year that marked
the beginning of growing difficulties for the bank. The roots
of the general economic and bank crisis that ruined the
Medici Bank resemble those Carlo M. Cipolla identifies in his
study of fourteenth-century Florence. As a matter of fact,
credit expansion resulting from bankers’ misappropriation of
demand deposits gave rise to an artificial boom fed by the
increase in the money supply and its seemingly “beneficial”
short-term effects. Nevertheless, since this process sprang
from an increase in the money supply, namely credit
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 73
condottieri, and political figures, such as Philippe de Com-
mines and Ymbert de Batarnay. Such deposits were not usu-
ally payable on demand but were either explicitly or implic-
itly time deposits on which interest, or rather discrezione,
was paid. (De Roover, The Rise and Decline of the Medici Bank
1397–1494, p. 101)
59Ibid., p. 213.
60Ibid., p. 245.
unbacked by growth in real savings, the reversal of the
process was inevitable, as chapters 4 and following will
explain in detail. This is exactly what happened in Italy’s large
business centers in the second half of the fifteenth century. In
terms of economic analysis, Raymond de Roover’s grasp of
the historical process is unfortunately even shallower than
Cipolla’s, and he even goes so far as to state, “what caused
these general crises remains a mystery.”61 However, it is not
surprising that the Medici Bank eventually failed, as did the
other banks that depended on fractional-reserve banking for a
large part of their business. Though Raymond de Roover
claims he does not understand what caused the general crisis
at the end of the fifteenth century, his blow-by-blow historical
account of the final stage of the Medici Bank reflects all of the
typical indications of an inescapable recession and credit
squeeze following a process of great artificial credit expan-
sion. De Roover explains that the Medicis were forced to
adopt a policy of credit restriction. They demanded the repay-
ment of loans and attempted to increase the bank’s liquidity.
Moreover, it has been demonstrated that in its final stage the
Medici Bank was operating with a very low reserve ratio,
which even dropped below 10 percent of total assets and was
therefore inadequate to meet the bank’s obligations during the
recession period.62The Medici Bank eventually failed and all
74
Money, Bank Credit, and Economic Cycles
61Ibid., p. 239.
62Hence, over the bank’s lifespan, its owners gradually increased their
violations of the traditional legal principle requiring them to maintain
possession of 100 percent of demand deposits, and their reserve ratio
continuously decreased:
A perusal of the extant balance sheets reveals another signifi-
cant fact: the Medici Bank operated with tenuous cash
reserves which were usually well below 10 percent of total
assets. It is true that this is a common feature in the financial
statements of medieval merchant-bankers, such as Francesco
Datini and the Borromei of Milan. The extent to which they
made use of money substitutes is always a surprise to mod-
ern historians. Nevertheless, one may raise the question
whether cash reserves were adequate and whether the Medici
Bank was not suffering from lack of liquidity. (Ibid., p. 371)
of its assets fell into the hands of its creditors. The bank’s com-
petitors failed for the same reasons: the unavoidable effects of
the artificial expansion and subsequent economic recession
invariably generated by the violation of the traditional legal
principles governing the monetary irregular deposit.
BANKING IN CATALONIA IN THE FOURTEENTH AND FIFTEENTH
CENTURIES: THE TAULA DE CANVI
The emergence of private banks in Barcelona coincided
with the development of private banking in large Italian busi-
ness centers. During the reign of Jaime I, the Conqueror,
(1213–1276), the Gothic and Roman laws governing business
were repealed and replaced by the Usos de Barcelona. In addi-
tion, a thorough, detailed set of regulations to control banking
was established by the Cortes of 1300–1301. It set down the
powers, rights, and responsibilities of bankers, and stipulated
requirements with respect to guarantors. Some of the rules
adopted are quite relevant to our topic.
For example, on February 13, 1300 it was established that
any banker who went bankrupt would be vilified throughout
Barcelona by a public spokesman and forced to live on a strict
diet of bread and water until he returned to his creditors the
full amount of their deposits.63Furthermore, on May 16, 1301,
one year later, it was decided that bankers would be obliged
to obtain collateral or guarantees from third parties in order to
operate, and those who did not would not be allowed to
spread a tablecloth over their work counter. The purpose was
to make clear to everyone that these bankers were not as sol-
vent as those using tablecloths, who were backed by collateral.
Any banker who broke this rule (i.e., operated with a table-
cloth but without collateral) would be found guilty of fraud.64
In view of these regulations, Barcelona’s banking system must
initially have been quite solvent and banks must have largely
respected the essential legal principles governing the mone-
tary bank deposit.
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 75
63Usher, The Early History of Deposit Banking in Mediterranean Europe, p.
239.
64Ibid., p. 239.
Nevertheless, there are indications to show that, in spite of
everything, private bankers soon began to deceive their
clients, and on August 14, 1321 the regulations pertaining to
bank failures were modified. It was established that those
bankers who did not immediately fulfill their commitments
would be declared bankrupt, and if they did not pay their
debts within one year, they would fall into public disgrace,
which would be proclaimed throughout Catalonia by a town
crier. Immediately afterward, the banker would be beheaded
directly in front of his counter, and his property sold locally to
pay his creditors. In fact, this is one of the few historical
instances in which public authorities have bothered to effec-
tively defend the general principles of property rights with
respect to the monetary bank-deposit contract. While it is
likely that most Catalonian bankers who went bankrupt tried
to escape or pay their debts within a year, documentary evi-
dence shows that at least one banker, a certain Francesch
Castello, was beheaded directly in front of his counter in 1360,
in strict accordance with the law.65
Despite these sanctions, banks’ liquid funds did not match
the amount received on demand deposit. As a result, they
eventually failed en masse in the fourteenth century, during
the same economic and credit recession that ravaged the Ital-
ian financial world and was studied by Carlo M. Cipolla.
Though there are signs that Catalonian banks held out a bit
longer than Italian ones (the terrible penalties for fraud
undoubtedly raised reserve ratios), documents show that in
the end, Catalonian banks also generally failed to meet their
obligations. In March 1397, further regulations were intro-
duced when the public began to complain that bankers were
reluctant to return money deposited, offered their clients all
76
Money, Bank Credit, and Economic Cycles
65Ibid., pp. 240 and 242. In light of recent scandals and bank crises in
Spain, one could jokingly wonder if it might not be a good idea to again
punish fraudulent bankers as severely as in fourteenth-century Catalo-
nia. A student of ours, Elena Sousmatzian, says that in the recent bank
crisis that devastated Venezuela, a senator from the Social-Christian
Party Copei even “seriously” suggested such measures in a statement to
the press. Incidentally, her remarks were quite well-received among
depositors affected by the crisis.
sorts of excuses, told them to “come back later” and would
pay them (in the end, if the clients were lucky) only in small
coins of little value and never in the gold which had originally
been deposited.66
The bank crisis of the fourteenth century did not lead to
increased monitoring and protection of the property rights of
depositors. Instead, it resulted in the creation of a municipal
government bank, the Taula de Canvi, Barcelona’s Bank of
Deposit. This bank was formed with the purpose of taking in
deposits and using them to finance city expenditures and the
issuance of government bond certificates for the city of
Barcelona. Hence, the Taula de Canvi fits the traditional model
of a bank created by public authorities to take direct advan-
tage of the dishonest profits of banking. A.P. Usher studied the
life of this bank in detail. Predictably, it ended up suspending
payments (in February 1468), because a large portion of its
reserves had been channeled into loans to the city of Barcelona
and the bank was unable to satisfy depositors’ demands for
cash withdrawals.67From that point on, the bank was reor-
ganized and gradually given more and more privileges, such
as a monopoly on all deposits deriving from judicial attach-
ments and seizures. This was an almost guaranteed source of
continuous income and acted as collateral for loans to finance
the city’s projects. The Taula was also granted a monopoly on
resources from all administrative deposits, guardianships and
testate proceedings. These funds were deposited and fixed in
the bank.68
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 77
66Ibid., p. 244.
67
In February 1468, after a long period of strain, the Bank of
Deposit was obliged to suspend specie payments completely.
For all balances on the books at that date, annuities bearing
interest at 5 percent were issued to depositors willing to
accept them. Those unwilling to accept annuities remained
creditors of the bank, but they were not allowed to withdraw
funds in cash. (Ibid., p. 278)
68Documents show that in 1433, at least 28 percent of deposits in
Barcelona’s Taula de Canvi came from compulsory judicial seizures and
were very stable. See Usher, The Early History of Deposit Banking in
Mediterranean Europe, p. 339, and Kindleberger, A Financial History of
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