"
"
Banking during the reign of Charles V is a good example
of the scenario we have been describing. First, the massive
influx of precious metals from the Americas shifted the eco-
nomic focus, at least temporarily, from the Northern Italian
trading cities to Spain; specifically, Seville and the other Span-
ish business centers. Second, due to his imperial policy,
Charles V was in constant need of funds, and he turned to the
banking system for a continual source of financing. In this
way, he unscrupulously took advantage of the liquidity it pro-
vided him and powerfully reinforced the traditional complic-
ity between authorities and bankers. Amore disguised collab-
oration between the two was already the norm at that time.
Furthermore, Charles V was unable to keep the royal treasury
from going bankrupt, which, as could be expected, had very
negative effects on the Spanish economy and on the bankers
who had financed his projects. All of these events motivated
the most brilliant minds of the time, the scholars of the School
of Salamanca, to reflect on the financial and banking activities
they witnessed. These theorists left us with some very valu-
able analyses worthy of being studied in detail. We will now
examine each of the historical events in order.
78
Money, Bank Credit, and Economic Cycles
Western Europe, p. 49. At any rate, the reserve ratio progressively wors-
ened until the suspension of payments in 1468. Following its reorgani-
zation at that time, Barcelona’s Bank of Deposit managed a fragile finan-
cial existence for the next 300 years, due to the privileges it enjoyed with
respect to judicial deposits and the limits established on loans to the city.
Shortly after Barcelona was captured by the Bourbons on September 14,
1714, the bank was taken over by a new institution with statutes drafted
by the Count of Montemar on January 14, 1723. These statutes were the
bank’s backbone until its final liquidation in the year 1853.
69Another English version of this section appeared in Jesús Huerta de
Soto, “New Light on the Prehistory of the Theory of Banking and the
School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996):
59–81.
THE DEVELOPMENT OF BANKING IN SEVILLE
Ramon Carande deserves credit for uncovering in some
detail the development of private banking in Seville during
the reign of Charles V.70 According to Carande, his research
was aided by the discovery of a list of bankers compiled prior
to the confiscation of precious metals by Seville’s Casa de Con-
tratación (Trading House) in 1545. An impoverished treasury
prompted Charles V to disregard the most basic legal princi-
ples and seize funds where he could find them: i.e., deposited
in the vaults of Seville’s bankers. Granted, these bankers also
violated the basic legal principles governing the monetary
irregular deposit and employed in their own private dealings
a large share of the money deposited. However, the emperor’s
policy of directly confiscating whatever funds remained in
their vaults incited bankers to routinely loan to third parties
most money on deposit. If there was ultimately no guarantee
that public authorities would respect bank reserves (and
bankers’ own experience taught them that, when short of
money, the emperor had no qualms about forcibly appropriat-
ing those funds in the form of compulsory loans to the
Crown), it seemed wiser to invest most deposited money in
loans to private industry and commerce, thus evading expro-
priation and earning higher profits.
The practice of confiscating deposits is perhaps the most
extreme example of public authorities’ traditional tendency to
capitalize on banking profits by expropriating the assets of
those who have a legal duty to better guard the deposits of
others. It is therefore understandable that rulers, being the
main beneficiaries of bankers’ dubious activities, ended up
justifying them and granting bankers all kinds of privileges to
allow them to continue operating with a fractional reserve, on
the fringes of legality.
In his chief work, Carlos V y sus banqueros, Ramón Carande
lists the most important bankers in the Seville of Charles V,
namely the Espinosas, Domingo de Lizarrazas, and Pedro de
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 79
70Ramón Carande, Carlos V y sus banqueros, 3 vols. (Barcelona and
Madrid: Editorial Crítica, 1987).
Morga, along with the less prominent Cristóbal Francisquín,
Diego Martínez, Juan Íñiguez, and Octavio de Negrón. All of
them inexorably went bankrupt, for the most part due to a
lack of liquidity with which to satisfy depositors’ withdrawals
of demand deposits. This demonstrates they were operating
with a fractional reserve, aided by a license or privilege
obtained from the city of Seville and from Charles V himself.71
We do not have information on their exact reserve ratio, but
we do know that on many occasions they made personal
investments in the fleet used for trading with the Americas, in
the collection of taxes, etc. Such risky ventures were always
tremendously tempting, because when they went reasonably
well they yielded enormous profits. Moreover, as mentioned
above, the repeated confiscation of bank deposits of precious
metals only further encouraged bankers to carry on their ille-
gitimate activities. Consequently, the Espinosas’ bank failed in
1579 and the senior partners were imprisoned. The bank of
Domingo de Lizarrazas failed on March 11, 1553, when he was
unable to make a payment of more than six and a half million
maravedis, while the bank of Pedro de Morga, who began his
operations in 1553, failed in 1575, during the second bank-
ruptcy of Philip II. The less prominent banks suffered the
same fate. Thomas Gresham made an interesting comment on
this issue. He had traveled to Seville with instructions to with-
draw three hundred twenty thousand ducats in cash, for
which he had obtained the necessary license from the emperor
and Queen Mary. Gresham marveled that in the very city that
received the treasures of the Indies money could be so
extremely scarce. The same was true for the markets, and Gre-
sham feared that all the city’s banks would suspend payments
80
Money, Bank Credit, and Economic Cycles
71Spanish banks of the seventeenth century had no better luck:
At the beginning of the seventeenth century there were
banks in the court, Seville, Toledo and Granada. Shortly after
1622, Alejandro Lindo complained that not one still existed,
the last one (owned by Jacome Matedo) having failed in
Seville. (M. Colmeiro, Historia de la economía política española
[1863; Madrid: Fundación Banco Exterior, 1988], vol. 2, p.
342)
as soon as his withdrawal was completed.72It is unfortunate
that Ramón Carande uses such inadequate analytical tools
and that his interpretation of these bank failures derives
mainly from anecdotal information, such as the greed for met-
als, which constantly threatened banks’ solvency; bankers’
daring personal business ventures (their involvement in the
chartering of vessels, overseas merchant shipping, insurance,
various types of speculation, etc.), which continually placed
them in serious predicaments; and the royal treasury’s repeated
confiscation of valuables and its want of liquidity. He never
once mentions the following chain of events: Fractional-reserve
banking led to an artificial credit expansion unsupported by
sufficient real savings; this, along with the inflation of precious
metals from the Americas, generated an artificial boom; the
boom, in turn, produced an economic crisis and inevitable
recession; and this was the true cause of the bank failures.
Fortunately, Ramón Carande’s omission of theory has been
at least partially compensated for by Carlo M. Cipolla’s inter-
pretative study of the economic and bank crisis of the second
half of the sixteenth century. Though this analysis refers strictly
to Italian banks, it is also directly applicable to the Spanish
financial system, due to the intimate relationship existent at the
time between the financial and trade routes of the two coun-
tries.73Cipolla explains that in the second half of the sixteenth
century, the money supply (what we refer to today as M1 or
M2) included a large amount of “bank money,” or deposits cre-
ated out of nowhere by bankers who did not maintain posses-
sion of 100 percent of the cash on demand deposit. This gave
rise to a period of artificial economic growth, which began to
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 81
72Eventually, after much effort, he was able to obtain around 200,000
ducats, writing at the time, “I am afraid I will cause the failure of all the
banks in Seville.” See Carande, Carlos V y sus banqueros, vol. 1, pp.
299–323, esp. pp. 315–16, which refer to Gresham’s visit to Seville.
73See Cipolla’s Money in Sixteenth-Century Florence (Berkeley: University
of California Press, 1989), esp. pp. 101ff. The intimate financial and trade
relationship between Spain and Italy in the sixteenth century is very
well documented in Felipe Ruiz Martín’s book, Pequeño capitalismo, gran
capitalismo: Simón Ruiz y sus negocios en Florencia (Barcelona: Editorial
Crítica, 1990).
reverse in the second half of the sixteenth century, when
depositors nervously started to experience economic difficul-
ties and the most important Florentine banks began to fail.
According to Cipolla, this phase of expansion was set in
motion in Italy by the directors of the Ricci Bank, who used a
very large share of their deposits to buy government securities
and grant loans. The other private banks were obliged to
adopt the same policy of credit expansion if their managers
wanted to be competitive and conserve their profits and mar-
ket share. This process gave rise to a credit boom which led to
a phase of great artificial expansion that soon began to
reverse. In 1574, a proclamation accused bankers of refusing to
return deposits in cash and denounced the fact that they only
“paid with ink.” It became increasingly more difficult for
them to return deposits in ready cash, and Venetian cities
began to experience a significant money scarcity. Craftsmen
could not withdraw their deposits nor pay their debts and a
severe credit squeeze (i.e., deflation) followed, along with a
serious economic crisis analyzed in detail by Cipolla in his
interesting work. From a theoretical standpoint, Cipolla’s
analysis is stronger than Ramón Carande’s, although it is not
completely adequate either, as it places more emphasis on the
crisis and credit squeeze than on the prior stage of artificial
credit expansion, wherein lies the true root of the evil. The
credit expansion phase, in turn, is rooted in the failure of
bankers to comply with the obligation to safeguard and main-
tain intact 100 percent of the tantundem.74
82
Money, Bank Credit, and Economic Cycles
74Cipolla indicates that in the 1570s, the Ricci Bank could no longer
meet demands for cash withdrawals and actually suspended payments,
only paying “in ink” or with bank policies. Florentine authorities
focused on just the symptoms of this worrisome situation and made the
typical attempt to resolve it with mere ordinances. They imposed upon
bankers the obligation to pay their creditors immediately in cash, but
they did not diagnose nor attack the fundamental source of the problem
(the misappropriation of deposits and channeling of them into loans
and the failure to maintain a 100-percent cash reserve). Consequently,
the decrees which followed failed to have the desired effect and the cri-
sis gradually worsened until it exploded violently in the mid-1570s. See
Cipolla, Money in Sixteenth-Century Florence, p. 107.
Of international relevance were the long-standing rela-
tions between Charles V and members of the prominent Fug-
ger banking family (known in Spain as the Fúcares). The Fug-
gers of Augsburg started out as wool and silver merchants and
also traded spices between their city and Venice. Later they
concentrated on banking, and in their heyday they operated
eighteen branches in different parts of Europe. They granted
loans to help finance the election of Charles V as emperor and
later funded his exploits on many occasions, receiving as col-
lateral both the silver shipments from the Americas and the
authorization to collect taxes. Their business came to a stand-
still and barely escaped bankruptcy in 1557 when Philip II de
facto suspended payments, and in fact they continued to lease
the lands belonging to military orders until 1634.75
THE SCHOOL OF SALAMANCA AND THE BANKING BUSINESS
These financial and banking phenomena did not go unno-
ticed by the illustrious minds of members of the School of
Salamanca who, according to the most reliable research,
paved the way for the modern subjectivist theory of value,
developed by the Austrian School of economics.76
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 83
75The best source on the relations between the Fugger Bank and Charles
V is arguably Ramón Carande’s Carlos V y sus banqueros. Also deserving
mention is a study by Rafael Termes Carreró, entitled Carlos V y uno de
sus banqueros: Jacobo Fugger (Madrid: Asociación de Caballeros del
Monasterio de Yuste, 1993). Rafael Termes makes an interesting obser-
vation about the Fuggers’ dominance in Spain, pointing out that
there is a street in Madrid named after the Fuggers. Calle de
Fúcar, between Atocha and Moratín streets, bears the his-
panized version of their last name. In addition, the word
fúcar is listed even today as meaning “rich and wealthy per-
son” in the Diccionario of the Spanish Royal Academy. (p. 25)
76The following authors, among others, have recently examined the
contributions of Spanish scholastics to economic theory: Murray N.
Rothbard, “New Light on the Prehistory of the Austrian School,” in The
Foundations of Modern Austrian Economics, Edwin G. Dolan, ed. (Kansas
City, Mo.: Sheed and Ward, 1976), pp. 52–74, and Economic Thought
Before Adam Smith, chap. 4, pp. 97–133; Lucas Beltrán, “Sobre los orí-
genes hispanos de la economía de mercado,” in Ensayos de economía
Chronologically speaking, the first work to consider,
and perhaps the most relevant to our thesis, is Instrucción de
mercaderes (Instruction to merchants), written by Doctor Luis
84
Money, Bank Credit, and Economic Cycles
política (Madrid: Unión Editorial, 1996), pp. 234–54; Marjorie Grice-
Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory
1544–1605 (Oxford: Clarendon Press, 1952), Early Economic Thought in
Spain 1177–1740 (London: George Allen and Unwin, 1978), and Economic
Thought in Spain: Selected Essays of Marjorie Grice-Hutchinson, Laurence S.
Moss and Christopher K. Ryan, eds. (Aldershot, England: Edward Elgar,
1993); Alejandro A. Chafuen, Christians for Freedom: Late-Scholastic Eco-
nomics (San Francisco: Ignatius Press, 1986); and Huerta de Soto, “New
Light on the Prehistory of the Theory of Banking and the School of Sala-
manca,” pp. 59–81. The intellectual influence of the School of Salamanca
on the Austrian School is not a mere coincidence or quirk of history, but
a consequence of the close historical, political and cultural connections
established between Spain and Austria during the time of Charles V and
his brother Ferdinand I. These ties lasted for several centuries, and Italy
played a crucial role in them, acting as a true cultural, economic and
financial link between the two furthermost tips of the Empire (Spain and
Vienna). (On this subject, we recommend Jean Bérenger’s interesting
book, A History of the Habsburg Empire, 1273–1700, C.A. Simpson, trans.
[London: Longman, 1994, pp. 133–35]). Nevertheless, the scholastics’
doctrine on banking has been largely overlooked in the above writings.
Marjorie Grice-Hutchinson does touch upon the topic with a near verba-
tim reproduction of Ramón Carande’s brief contribution to the matter
(see The School of Salamanca, pp. 7–8). Ramón Carande, in turn, simply
cites (on pp. 297–98 of volume 1 of his book, Carlos V y sus banqueros)
Tomás de Mercado’s reflections on banking. A more profound examina-
tion is made by Alejandro A. Chafuen, who at least reports Luis de
Molina’s views on banking and considers the extent to which the School
of Salamanca approved or disapproved of fractional-reserve banking.
Another relevant source is Restituto Sierra Bravo’s work, El pensamiento
social y económico de la Escolástica desde sus orígenes al comienzo del catoli-
cismo social (Madrid: Consejo Superior de Investigaciones Científicas,
Instituto de Sociología “Balmes,” 1975). Volume 1, pp. 214–37 includes a
rather biased interpretation of the views of members of the School of
Salamanca on the banking business. According to Sierra Bravo, some
among the School’s theorists (including Domingo de Soto, Luis de
Molina, and even Tomás de Mercado) tended to accept fractional-
reserve banking. However, he ignores the writings of other members of
the School who, on firmer theoretical grounds, held a radically oppos-
ing view. The same criticism can be applied to references Francisco G.
Camacho makes in his prefaces to the Spanish translations of Molina’s
works, particularly his “Introduction” to La teoría del justo precio
Saravia de la Calle and published in Medina del Campo in
1544. Saravia de la Calle criticizes bankers harshly, calling
them “voracious gluttons who swallow everything, destroy
everything, confuse everything, steal and soil everything, like
the harpies of Phineus.”77He says bankers “go out into the
street and square with their table and chair and cash-box and
book, like harlots to the brothel with their chair,” and having
obtained the necessary license and guarantee required by the
laws of the kingdom, they set about acquiring deposits from
clients, to whom they offer bookkeeping and cashier services,
making payments from clients’ accounts as ordered and even
paying interest on such deposits.
With sound legal reasoning, Saravia de la Calle indicates
that interest is incompatible with the nature of the monetary
deposit, and that in any case, the banker should receive a fee
for the custody and safekeeping of the money. He even
severely rebukes customers who enter into such deals with
bankers, and states:
And if you say, merchant, that you do not lend the money,
but that you deposit it, that is a greater mockery; for who
ever saw the depositary pay? He is usually paid for the trou-
ble of safeguarding the deposit. Furthermore, if you now
entrust your money to the profiteer as a loan or deposit, just
as you receive a part of the profit , you also earn a portion of
guilt, even a greater portion.78
In chapter 12 of his book, Saravia de la Calle makes a neat
distinction between the two radically different operations
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 85
(Madrid: Editora Nacional, 1981), esp. pp. 33–34. This version of the
doctrine, according to which some members of the School of Salamanca
accepted fractional-reserve banking, has been greatly influenced by an
article by Francisco Belda, S.J., entitled “Ética de la creación de créditos
según la doctrina de Molina, Lessio y Lugo,” published in Pensamiento
19 (1963): 53–89. For the reasons indicated in the text, we disagree with
the interpretation these authors make of the doctrine of the School of
Salamanca with respect to banking. We will consider these objections in
greater detail in section 1 of chapter 8.
77Saravia de la Calle, Instrucción de mercaderes, p. 180.
78Ibid., p. 181.
bankers carry out: demand deposits and time “deposits.” In
the first case, customers entrust their money interest-free to
bankers
so the money will be safer, and more accessible for making
payments, and to avoid the hassle and trouble of counting
and guarding it, and also because, in gratitude for this good
deed they do the moneylender in giving him their money, if
it so happens they have no money left under his charge, he
will also accept some overdrafts without interest.79
The second operation, the time “deposit,” is very different
from the first and is in fact a true loan or mutuum which is
granted the banker for a fixed term and yields interest. Saravia
de la Calle, in compliance with the traditional canonical doc-
trine on usury, condemns these transactions. Furthermore, he
clearly states that in the case of the demand-deposit contract,
customers should pay the banker
for if they deposit money, they should pay for the safekeep-
ing and should not derive as much profit as the laws permit
when depositing money or property that requires safe-
guarding.80
Saravia de la Calle goes on to censure those clients who self-
ishly try to capitalize on the illicit activity of bankers, making
deposits and expecting bankers to pay interest. As he vividly
puts it,
He who deposits his money with someone he knows will
not guard it, but will spend it, is not free from sin, at least
venial sin. He acts as one who turns over a virgin to a lecher
or a delicacy to a glutton.81
Moreover, the depositor cannot ease his conscience by
thinking the banker will loan or use other people’s money but
not his own.
86
Money, Bank Credit, and Economic Cycles
79Ibid., p. 195.
80Ibid., p. 196.
81Ibid., p. 197.
He believes the banker will probably guard the money he
deposits and not do business with it, when this cannot be
expected of any of these profiteers. On the contrary, the
banker will soon invest the deposit for profit and try to earn
money with it. How could bankers who pay 7 and 10 per-
cent interest to those who provide them with money to do
business with possibly refrain from using deposits? Even if
it had been clearly demonstrated that you do not sin (which
is not the case, quite the opposite), the moneylender very
certainly sins when he does business with your money and
he definitely uses your money to steal the property of your
neighbors.82
Saravia de la Calle’s doctrine is very coherent, inasmuch
as the self-interested use (via the granting of loans) of money
placed on demand deposit with bankers is illegitimate and
implies a grave sin. This doctrine coincides with the one orig-
inally established by the classical authors of Roman law, a
doctrine which derives naturally from the very essence, pur-
pose, and legal nature of the monetary irregular-deposit con-
tract, which we studied in chapter 1.
Saravia de la Calle also vividly describes the dispropor-
tionate profits bankers obtain through their illegitimate prac-
tice of appropriating deposits instead of being satisfied with
the more modest earnings they would receive for the simple
custody or safekeeping of deposits. His explanation is quite
descriptive:
If you receive a wage, it should be moderate and adequate
for your support, not the excessive loot with which you
build superb houses, buy lavish estates, pay servants and
provide extravagant luxuries for your families, and you give
great feasts and dress so splendidly, especially when you
were poor before you began your dealings, and you left
humble trades.83
In addition, Saravia de la Calle explains that bankers are
quite prone to bankruptcy, and he even carries out a cursory
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 87
82Ibid.
83Ibid., p. 186.
theoretical analysis which demonstrates that the expansionary
phase brought on by the artificial expansion of credit granted
by these “profiteers” is inevitably followed by a period of
recession, during which the non-payment of debts produces a
chain of bank failures. He adds that
the merchant does not pay the profiteer, he causes him to go
bankrupt, and he suspends payments and all is lost. As is
common knowledge, these moneylenders are the beginning,
occasion and even the cause of all this, because if they did not
exist, each person would use his money to the extent he could and
no more, and things would cost what they are worth and more
than a fair cash price would not be charged. Therefore it would
be very worthwhile for princes to stop tolerating these prof-
iteers in Spain, since no other nation in the world tolerates
them, and to banish this pestilence from their court and
kingdom.84
As we know, it is not true that the authorities of other
nations had controlled the activity of bankers more success-
fully than Spanish authorities. Instead, the same thing hap-
pened more or less everywhere, and rulers eventually granted
bankers privileges to allow them to make self-interested use of
their depositors’ money, in exchange for the ability to capital-
ize on a banking system which provided much faster and eas-
ier financing than taxes.
To conclude his analysis, Saravia de la Calle affirms that
a Christian should under no circumstances give his money
to these profiteers, because if he sins in doing so, as is
always the case, he should refrain from it to avoid sinning;
and if he does not sin, he should refrain to avoid causing the
moneylender to sin.
Furthermore, he adds that if bankers’ services are not used,
the following additional advantage will result: the depositors
will not be shocked if the moneylender suspends payments;
if he goes bankrupt, as we see so often and Our Lord God per-
mits, let him and his masters be lost like dishonest gains.85
88
Money, Bank Credit, and Economic Cycles
84Ibid., p. 190; italics added.
85Ibid., p. 198.
As we see, Saravia de la Calle’s analysis, along with his
cleverness and humor, is impeccable and free from contradic-
tions. However, in his criticism of bankers, he perhaps places
too much emphasis on the fact that they charged and paid
interest in violation of the canonical prohibition of usury,
instead of emphasizing that they misappropriated demand
deposits.
Another writer who examines the monetary irregular-
deposit contract is Martín de Azpilcueta, better known as
“Doctor Navarro.” In his book, Comentario resolutorio de cam-
bios (Resolutory commentary on exchanges), first published in
Salamanca at the end of 1556, Martín de Azpilcueta expressly
refers to “banking for safekeeping,” which consists of the
bank contract of monetary demand-deposit. For Martín de
Azpilcueta, banking for safekeeping, or the irregular deposit
contract, is fully just and means that the banker is
guardian, depositary and guarantor of the money given
him or exchanged for whatever purpose by those who give
or send him money, and that he is obliged to make pay-
ments to merchants or persons to whom depositors want
payments made in such and such a way, [for which] he
may legitimately charge a fair fee to the republic or the
depositors, as this trade and responsibility are useful to the
republic and free from iniquity; for it is fair for a worker to
earn his wages. And it is the moneychanger’s job to
receive, safeguard and keep the money of so many mer-
chants ready, and to write and keep their accounts, with
great difficulty and at times risk of error in their records
and in other things. This arrangement could be formalized
in a contract by which a person commits himself to hold
other people’s money in deposit, make payments and keep
records as arranged by them, etc., since this is an agree-
ment to hire a person for a job, which is a well-known, just
and blessed contract.86
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 89
86Martín de Azpilcueta, Comentario resolutorio de cambios (Madrid: Con-
sejo Superior de Investigaciones Científicas, 1965), pp. 57–58. In our
study of Dr. Navarro’s doctrines we have used the first Spanish edition,
As we see, Martín de Azpilcueta regards the monetary
irregular-deposit contract as a completely legitimate contract
by which people entrust the custody of their money to a pro-
fessional (the banker), who must safeguard it like a good par-
ent and keep it constantly available to the depositors, provid-
ing whatever cashier services they ask of him; and he has a
right to charge the depositors a fee for his services. As a mat-
ter of fact, Martín de Azpilcueta feels it is the depositors who
must pay the depositary or banker and never the reverse, so
depositors “pay in compensation for the trouble and worries
the moneychanger has in receiving and safeguarding their
money,” and bankers must conduct
their business honestly and be satisfied with a fair wage,
receiving it from those who owe it to them and whose
money they safeguard and whose accounts they keep, and
not from those who are not indebted to them.87
Moreover, in an effort to clarify matters and avoid confu-
sion, Martín de Azpilcueta (using the same reasoning as Doc-
tor Saravia de la Calle) expressly condemns clients who wish
to pay nothing for the custody of their deposits and try to even
earn interest on them. Doctor Navarro concludes that
in this sort of exchange, not only the moneychangers sin, but
also . . . those who entrust their money to them for safe-
keeping as above. They later refuse to pay a fee, claiming the
profits earned with their money and received from those
they pay in cash is enough of a wage. And if the money-
changers request a fee, the customers leave them and take
their business elsewhere. So, to keep these clients, the
bankers renounce their fee and instead take money from
those who owe them nothing.88
90
Money, Bank Credit, and Economic Cycles
published by Andrés de Portanarijs in Salamanca in 1556, as well as the
Portuguese edition, published by Ioam de Barreyra in Coimbra in 1560
and entitled Comentario resolutorio de onzenas. In this edition, the text cor-
responding to the above quotes appears on pp. 77–80.
87Azpilcueta, Comentario resolutorio de cambios, pp. 60–61.
88Ibid., p. 61.
In his book, Suma de tratos y contratos (Compilation of deals
and contracts) (Seville 1571), Tomás de Mercado performs an
analysis of the banking business very much in the same line as
the studies by the preceding authors. He begins by correctly
stating that depositors should pay bankers for the work of
safeguarding their monetary deposits, concluding that
it is a common, general rule among all bankers to be able to
take wages from those who deposit money in their bank, a
certain amount each year or for each thousand, because
bankers serve depositors and safeguard their assets.89
Nevertheless, Tomás de Mercado ironically points out that
bankers in Seville are so “generous” they charge nothing for
guarding deposits: “those of this city, it is true, are so regal and
noble they ask for and take no wage.”90Tomás de Mercado
observes that these bankers have no need to charge anything,
since the large amount of currency they obtain from deposits
earns them substantial profits in personal business deals. We
must emphasize that, in our opinion, Tomás de Mercado sim-
ply verifies a fact here and does not imply that he considers
these actions in any way legitimate, as various modern
authors (among others, Restituto Sierra Bravo and Francisco
G. Camacho) appear to suggest.91Quite the opposite is true.
From the standpoint of the purest Roman doctrine and the
essential legal nature of the monetary irregular-deposit con-
tract analyzed in chapter 1, Tomás de Mercado is the scholas-
tic writer who most clearly demonstrates that the transfer of
property in the irregular deposit does not imply a concomitant
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 91
89We quote the Instituto de Estudios Fiscales edition published in
Madrid in 1977, edited and prefaced by Nicolás Sánchez Albornoz, vol.
2, p. 479. Restituto Sierra Bravo has another edition, published by the
Editora Nacional in 1975. The above excerpt appears on page 401 of this
edition. The original edition was published in Seville in 1571 “en casa de
Hernando Díaz Impresor de Libros, en la calle de la Sierpe.”
90Mercado, Suma de tratos y contratos, vol. 2, p. 480 of the Instituto de
Estudios Fiscales edition and p. 401 of the Restituto Sierra Bravo edition.
91See the writings by Restituto Sierra Bravo, Francisco Belda, and Fran-
cisco García Camacho cited in footnote 76.
transfer of availability of the tantundem and therefore, for all
practical purposes, there is no full transfer of property. He
expresses himself quite well: “they [bankers] must under-
stand that the money is not theirs, but belongs to others; and
it is not fair that by using it, they cease to serve its owner.”
Tomás de Mercado adds that bankers should obey two funda-
mental principles. First: they should
not strip the bank so bare they cannot then cover the drafts
they receive, because if they become unable to pay them
because they have spent and invested the money in shady
business and other deals, they certainly sin. . . . Second: they
should not become involved in risky business deals, for they
sin even if the deals turn out successfully, because the
bankers chance not being able to fulfill their responsibilities
and doing serious harm to those who have trusted them.92
Though one could take these recommendations as an indi-
cation that Tomás de Mercado resigns to accept a certain frac-
tional reserve, it is important to keep in mind that he is very
emphatic in expressing his legal opinion that deposited
money does not ultimately belong to bankers but to deposi-
tors, and in stating, furthermore, that none of the bankers
complies with his two recommendations:
however, since when business goes well, in affluent circum-
stances, it is very difficult to bridle greed, none of them
takes heed of these warnings nor meets these conditions.93
For this reason, he considers the regulations enacted by the
Emperor Charles V in this respect to be very beneficial. They
prohibited bankers from carrying out personal business deals
and were aimed at eliminating the temptation to finance such
dealings indefinitely with money obtained from depositors.94
92
Money, Bank Credit, and Economic Cycles
92Mercado, Suma de tratos y contratos, vol. 2, p. 480 of the Instituto de
Estudios Fiscales edition and p. 401 of the Restituto Sierra Bravo edition.
93Ibid.
94Nueva Recopilación, law 12, title 18, book 5, enacted in Zamora on June
6, 1554 by Charles V, Queen Juana, and Prince Philip; it reads:
Also, at the end of chapter 4 of Suma de tratos y contratos,
Tomás de Mercado states that the bankers of Seville hold
deposits of money and precious metals belonging to merchants
who traded with the New World, and that with such consid-
erable deposits they “make great investments,” obtaining
hefty profits. Here he does not openly condemn these prac-
tices, but we must remember that the passage in question is,
again, more a description of a state of affairs than a judgment
on its legitimacy. However, he does consider the issue of legit-
imacy in greater depth in chapter 14, which we have already
covered. Tomás de Mercado concludes as well that bankers
are also involved in exchanging and charging; bankers in
this republic engage in an extremely wide range of activi-
ties, wider than the ocean, but sometimes they spread them-
selves too thin and all is lost.95
The scholastics most misguided in their doctrinal treat-
ment of the monetary irregular-deposit contract are Domingo
de Soto and (especially) Luis de Molina and Juan de Lugo.
Indeed, these theorists allowed themselves to be influenced
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 93
Because the public banks in the markets of Medina del
Campo, Rioseco and Villalón, and in the cities, towns and vil-
lages of these kingdoms . . . [have engaged in business other
than their specific task concerning money], they have as a
result suspended payments and failed; [in order to] avoid the
above-mentioned events, we decree that, from now on, they
confine themselves to their specific duty, and that not just one
person but at least two be required to establish these public
banks . . . and that before they . . . [can practice their profes-
sion], they must provide sufficient guarantees. (italics added)
Note that “public banks” refers here not to government banks but to pri-
vate banks which may receive deposits from the public under certain
conditions (at least two owners, sufficient guarantees, etc.). See José
Antonio Rubio Sacristán, “La fundación del Banco de Amsterdam (1609)
y la banca de Sevilla,” Moneda y crédito (March 1948).
95This is the quotation of Mercado which Ramón Carande includes in
vol. 1 of Carlos V y sus banqueros, in the introduction to his treatment of
bankers in Seville and the crisis that led them all to fail. See Mercado,
Suma de tratos y contratos, vol. 2, pp. 381–82 of the 1977 edition of the
Instituto de Estudios Fiscales and p. 321 of the Sierra Bravo edition.
by the medieval tradition of the glossators, which we covered
in section 2 of this chapter, and especially by the doctrinal con-
fusion resulting from the depositum confessatum. De Soto and
especially Molina view the irregular deposit as a loan in which
both the ownership and full availability of the tantundem are
transferred to the banker. Therefore, they believe the practice
of loaning deposited funds to third parties is legitimate, as
long as bankers act in a “prudent” manner. Domingo de Soto
could be considered the first to maintain this thesis, though he
did so very indirectly. In fact, in book 6, topic 11 of his work,
La justicia y el derecho (On justice and law) (1556), we read that
bankers have the
custom, it is said, of being liable for a greater amount of
money than that deposited if a merchant makes his deposit
in cash. I gave the moneychanger ten thousand; so he will be
liable to me for twelve, perhaps fifteen; because having cash
is very profitable for the moneychanger. Neither is any evil
seen in it.96
Another typical example of credit creation which
Domingo de Soto appears to accept is a loan in the form of the
discount of bills, financed using clients’ deposits.
Nevertheless, the Jesuit Luis de Molina is the scholar who
has most clearly maintained an erroneous doctrine on the
bank contract of monetary irregular deposit.97Indeed, in
94
Money, Bank Credit, and Economic Cycles
96
Habet autem praeterea istorum usus, ut fertur si mercatorum
quispiam in cambio numeratam pecuniam deponat, campsor
pro maio ri illius gratia respondeat. Numeravi campsori dece
milia: fide habebo apud ipsum & creditu pro duodecim, & for-
fam pro quim decim: qui capsori habere numerata pecuniam
bonum est lucrum. Neq, vero quicq vitij in hoc foedere
apparet. (Domingo de Soto, De iustitia et iure [Salamanca:
Andreas Portonarijs, 1556], book 6, topic 11, the only article,
p. 591. Instituto de Estudios Políticos edition [Madrid, 1968],
vol. 3, p. 591)
Sierra Bravo (El pensamiento social y económico de la Escolástica, p. 215) is
of the opinion that these words by Domingo de Soto imply his accept-
ance of fractional-reserve banking.
97It is very significant that various authors, including Marjorie Grice-
Hutchinson, hesitate to place Luis de Molina among the theorists of the
Tratado sobre los cambios (Treatise on exchanges) (1597), he
upholds the medieval doctrine that the irregular deposit is a
loan or mutuum contract in favor of the banker, a contract in
which not only ownership is transferred, but full availability of
the tantundem as well, which means the banker can legitimately
use the money in his own interest, in the form of loans or in any
other manner. Let us see how he presents his argument:
Because these bankers, like all the others, are true owners of
the money deposited in their banks, and they differ greatly in
this way from other depositaries . . . so they receive the money
as a precarious loan and hence, at their own risk.
Further on he indicates even more clearly that
such a deposit is really a loan, as has been said, and ownership
of the money deposited is transferred to the banker, so if it is
lost it is lost to the banker.98
This position conflicts with the doctrine Luis de Molina
himself upholds in Tratado sobre los préstamos y la usura (Treatise
on loans and usury), where he indicates that a term is an essen-
tial element of all loan contracts, and that if the duration of a
loan has not been expressly stipulated and a date for its return
set, “it will be necessary to accept the decision of the judge as
to the loan’s duration.”99Moreover, Luis de Molina ignores all
of the arguments presented in chapter 1 to demonstrate that
the irregular deposit contract has nothing in common, in
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 95
School of Salamanca: “The inclusion of Molina in the School seems to
me now to be more dubious.” Marjorie Grice-Hutchinson, “The Concept
of the School of Salamanca: Its Origins and Development,” chapter 2 of
Economic Thought in Spain: Selected Essays of Marjorie Grice-Hutchinson, p.
25. It seems clear that the core members of the School of Salamanca were
Dominican, and at least on banking matters it is necessary to separate
them from Jesuit theologians, a deviationist and much less rigorous
group.
98Luis de Molina, Tratado sobre los cambios, edited and introduced by
Francisco Gómez Camacho (Madrid: Instituto de Estudios Fiscales,
1991), pp. 137–40. The original edition was published in Cuenca in 1597.
99Luis de Molina, Tratado sobre los préstamos y la usura, edited and intro-
duced by Francisco Gómez Camacho (Madrid: Instituto de Estudios Fis-
cales, 1989), p. 13. The original edition was published in Cuenca in 1597.
terms of legal nature and essence, with the loan or mutuum
contract. Therefore, his doctrinal attempt to identify the two
contracts with each other is a clear step backward, not only in
relation to the much more coherent views of Saravia de la
Calle and Martin de Azpilcueta, but also with respect to the
true legal nature of the contract as it had already been devel-
oped by Roman juridical science. Therefore, it is strange that
a mind as bright and penetrating as Luis de Molina did not
realize the extreme danger of accepting the violation of the
general legal principles governing the irregular deposit, and
that he claimed,
it never occurs that all the depositors need their money in
such a way that they do not leave many thousands of ducats
deposited, with which the bankers can do business and
either earn a profit or suffer a loss.100
Molina does not recognize that in this way not only is the
objective or essential purpose of the contract (custody and
safekeeping) violated, but also that an incentive is provided
for all sorts of illicit dealings and abuses which inexorably
generate an economic recession and bank failures. When the
traditional legal principle requiring the continual safekeeping
of the tantundem in favor of the depositor is not respected, there
is no clear guide to avoiding bank failures. Furthermore, it is
obvious that such vague, superficial suggestions as “try to act
prudently” and “do not become involved in risky business
deals” are not sufficient help in preventing the very harmful
economic and social effects of fractional-reserve banking. At
any rate, Luis de Molina does at least bother to state,
It is important to warn that [bankers] commit mortal sin if
they use in their own business dealings so much of the
money they hold on deposit that they are later unable, at the
right time, to hand over the quantities the depositors request
or order to be paid against their deposited funds. . . . In
addition, they commit mortal sin if they become involved in
business dealings entailing a risk of not being able to return
deposits. For example, if they send so much merchandise
96
Money, Bank Credit, and Economic Cycles
100Molina, Tratado sobre los cambios, p. 137.
overseas that, should the ship sink or be captured by pirates,
they would not be able to repay deposits even after selling all
of their assets. And they are not guilty of mortal sin only when
the deal turns out poorly, but also when it turns out well. This is
due to the chance they take of hurting depositors and the guaran-
tors they themselves supply for the deposits.101
We find this warning of Luis de Molina admirable, but at
the same time we are astonished at his failure to recognize the
profound contradiction that ultimately exists between his
warning and his explicit acceptance of “prudent” fractional-
reserve banking. The fact is, regardless of how prudent
bankers are, the only surefire way to avoid risks and ensure
that deposits are permanently available to depositors is to
maintain a 100-percent reserve ratio at all times.102
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 97
101Ibid., pp. 138–39; italics added.
102After Molina, the leading scholar with a similar viewpoint on bank-
ing issues is Juan de Lugo, also a Jesuit. This suggests that, with regard
to banking, the School of Salamanca comprised two currents of thought:
one which was sound, doctrinally well-supported, close to the future
Currency School, and represented by Saravia de la Calle, Martín de
Azpilcueta, and Tomás de Mercado; and another, one more prone to the
follies of inflationism and to fractional-reserve banking, and close to the
future Banking School. Luis de Molina, Juan de Lugo, and to a much
lesser extent, Domingo de Soto exemplified this current. In chapter 8
we will set out this thesis in greater detail. For now we would just like
to point out that Juan de Lugo followed in Molina’s footsteps and gave
an especially clear warning to bankers:
Qui bene advertit, eivsmodi bancarios depositarios peccare
graviter, & damno subsequuto, cum obligatione restituendi
pro damno, quoties ex pecuniis apud se depositis tantam
summam ad suas negotiationes exponunt, ut inhabiles
maneant ad solvendum deposentibus, quando suo tempore
exigent. Et idem est, si negotiationes tales aggrediantur, ex
quibus periculum sit, ne postea ad paupertatem redacti pecu-
nias acceptas reddere non possint, v.g. si euenrus ex naviga-
tione periculosa dependeat, in qua navis hostium, vel
naufragij periculo exposita sit, qua iactura sequunta, ne ex
propio quidem patrimonio solvere possint, sed in creditorum,
vel fideiussorum damnum cedere debet. (R.P. Joannis de
Lugo Hispalensis, S.I., Disputationum de iustitia et iure tomus
secundus, Disp. 28, section 5 [Lyon: Sumptibus Petri Prost,
1642], pp. 406–07)
of the scenario we have been describing. First, the massive
influx of precious metals from the Americas shifted the eco-
nomic focus, at least temporarily, from the Northern Italian
trading cities to Spain; specifically, Seville and the other Span-
ish business centers. Second, due to his imperial policy,
Charles V was in constant need of funds, and he turned to the
banking system for a continual source of financing. In this
way, he unscrupulously took advantage of the liquidity it pro-
vided him and powerfully reinforced the traditional complic-
ity between authorities and bankers. Amore disguised collab-
oration between the two was already the norm at that time.
Furthermore, Charles V was unable to keep the royal treasury
from going bankrupt, which, as could be expected, had very
negative effects on the Spanish economy and on the bankers
who had financed his projects. All of these events motivated
the most brilliant minds of the time, the scholars of the School
of Salamanca, to reflect on the financial and banking activities
they witnessed. These theorists left us with some very valu-
able analyses worthy of being studied in detail. We will now
examine each of the historical events in order.
78
Money, Bank Credit, and Economic Cycles
Western Europe, p. 49. At any rate, the reserve ratio progressively wors-
ened until the suspension of payments in 1468. Following its reorgani-
zation at that time, Barcelona’s Bank of Deposit managed a fragile finan-
cial existence for the next 300 years, due to the privileges it enjoyed with
respect to judicial deposits and the limits established on loans to the city.
Shortly after Barcelona was captured by the Bourbons on September 14,
1714, the bank was taken over by a new institution with statutes drafted
by the Count of Montemar on January 14, 1723. These statutes were the
bank’s backbone until its final liquidation in the year 1853.
69Another English version of this section appeared in Jesús Huerta de
Soto, “New Light on the Prehistory of the Theory of Banking and the
School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996):
59–81.
THE DEVELOPMENT OF BANKING IN SEVILLE
Ramon Carande deserves credit for uncovering in some
detail the development of private banking in Seville during
the reign of Charles V.70 According to Carande, his research
was aided by the discovery of a list of bankers compiled prior
to the confiscation of precious metals by Seville’s Casa de Con-
tratación (Trading House) in 1545. An impoverished treasury
prompted Charles V to disregard the most basic legal princi-
ples and seize funds where he could find them: i.e., deposited
in the vaults of Seville’s bankers. Granted, these bankers also
violated the basic legal principles governing the monetary
irregular deposit and employed in their own private dealings
a large share of the money deposited. However, the emperor’s
policy of directly confiscating whatever funds remained in
their vaults incited bankers to routinely loan to third parties
most money on deposit. If there was ultimately no guarantee
that public authorities would respect bank reserves (and
bankers’ own experience taught them that, when short of
money, the emperor had no qualms about forcibly appropriat-
ing those funds in the form of compulsory loans to the
Crown), it seemed wiser to invest most deposited money in
loans to private industry and commerce, thus evading expro-
priation and earning higher profits.
The practice of confiscating deposits is perhaps the most
extreme example of public authorities’ traditional tendency to
capitalize on banking profits by expropriating the assets of
those who have a legal duty to better guard the deposits of
others. It is therefore understandable that rulers, being the
main beneficiaries of bankers’ dubious activities, ended up
justifying them and granting bankers all kinds of privileges to
allow them to continue operating with a fractional reserve, on
the fringes of legality.
In his chief work, Carlos V y sus banqueros, Ramón Carande
lists the most important bankers in the Seville of Charles V,
namely the Espinosas, Domingo de Lizarrazas, and Pedro de
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 79
70Ramón Carande, Carlos V y sus banqueros, 3 vols. (Barcelona and
Madrid: Editorial Crítica, 1987).
Morga, along with the less prominent Cristóbal Francisquín,
Diego Martínez, Juan Íñiguez, and Octavio de Negrón. All of
them inexorably went bankrupt, for the most part due to a
lack of liquidity with which to satisfy depositors’ withdrawals
of demand deposits. This demonstrates they were operating
with a fractional reserve, aided by a license or privilege
obtained from the city of Seville and from Charles V himself.71
We do not have information on their exact reserve ratio, but
we do know that on many occasions they made personal
investments in the fleet used for trading with the Americas, in
the collection of taxes, etc. Such risky ventures were always
tremendously tempting, because when they went reasonably
well they yielded enormous profits. Moreover, as mentioned
above, the repeated confiscation of bank deposits of precious
metals only further encouraged bankers to carry on their ille-
gitimate activities. Consequently, the Espinosas’ bank failed in
1579 and the senior partners were imprisoned. The bank of
Domingo de Lizarrazas failed on March 11, 1553, when he was
unable to make a payment of more than six and a half million
maravedis, while the bank of Pedro de Morga, who began his
operations in 1553, failed in 1575, during the second bank-
ruptcy of Philip II. The less prominent banks suffered the
same fate. Thomas Gresham made an interesting comment on
this issue. He had traveled to Seville with instructions to with-
draw three hundred twenty thousand ducats in cash, for
which he had obtained the necessary license from the emperor
and Queen Mary. Gresham marveled that in the very city that
received the treasures of the Indies money could be so
extremely scarce. The same was true for the markets, and Gre-
sham feared that all the city’s banks would suspend payments
80
Money, Bank Credit, and Economic Cycles
71Spanish banks of the seventeenth century had no better luck:
At the beginning of the seventeenth century there were
banks in the court, Seville, Toledo and Granada. Shortly after
1622, Alejandro Lindo complained that not one still existed,
the last one (owned by Jacome Matedo) having failed in
Seville. (M. Colmeiro, Historia de la economía política española
[1863; Madrid: Fundación Banco Exterior, 1988], vol. 2, p.
342)
as soon as his withdrawal was completed.72It is unfortunate
that Ramón Carande uses such inadequate analytical tools
and that his interpretation of these bank failures derives
mainly from anecdotal information, such as the greed for met-
als, which constantly threatened banks’ solvency; bankers’
daring personal business ventures (their involvement in the
chartering of vessels, overseas merchant shipping, insurance,
various types of speculation, etc.), which continually placed
them in serious predicaments; and the royal treasury’s repeated
confiscation of valuables and its want of liquidity. He never
once mentions the following chain of events: Fractional-reserve
banking led to an artificial credit expansion unsupported by
sufficient real savings; this, along with the inflation of precious
metals from the Americas, generated an artificial boom; the
boom, in turn, produced an economic crisis and inevitable
recession; and this was the true cause of the bank failures.
Fortunately, Ramón Carande’s omission of theory has been
at least partially compensated for by Carlo M. Cipolla’s inter-
pretative study of the economic and bank crisis of the second
half of the sixteenth century. Though this analysis refers strictly
to Italian banks, it is also directly applicable to the Spanish
financial system, due to the intimate relationship existent at the
time between the financial and trade routes of the two coun-
tries.73Cipolla explains that in the second half of the sixteenth
century, the money supply (what we refer to today as M1 or
M2) included a large amount of “bank money,” or deposits cre-
ated out of nowhere by bankers who did not maintain posses-
sion of 100 percent of the cash on demand deposit. This gave
rise to a period of artificial economic growth, which began to
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 81
72Eventually, after much effort, he was able to obtain around 200,000
ducats, writing at the time, “I am afraid I will cause the failure of all the
banks in Seville.” See Carande, Carlos V y sus banqueros, vol. 1, pp.
299–323, esp. pp. 315–16, which refer to Gresham’s visit to Seville.
73See Cipolla’s Money in Sixteenth-Century Florence (Berkeley: University
of California Press, 1989), esp. pp. 101ff. The intimate financial and trade
relationship between Spain and Italy in the sixteenth century is very
well documented in Felipe Ruiz Martín’s book, Pequeño capitalismo, gran
capitalismo: Simón Ruiz y sus negocios en Florencia (Barcelona: Editorial
Crítica, 1990).
reverse in the second half of the sixteenth century, when
depositors nervously started to experience economic difficul-
ties and the most important Florentine banks began to fail.
According to Cipolla, this phase of expansion was set in
motion in Italy by the directors of the Ricci Bank, who used a
very large share of their deposits to buy government securities
and grant loans. The other private banks were obliged to
adopt the same policy of credit expansion if their managers
wanted to be competitive and conserve their profits and mar-
ket share. This process gave rise to a credit boom which led to
a phase of great artificial expansion that soon began to
reverse. In 1574, a proclamation accused bankers of refusing to
return deposits in cash and denounced the fact that they only
“paid with ink.” It became increasingly more difficult for
them to return deposits in ready cash, and Venetian cities
began to experience a significant money scarcity. Craftsmen
could not withdraw their deposits nor pay their debts and a
severe credit squeeze (i.e., deflation) followed, along with a
serious economic crisis analyzed in detail by Cipolla in his
interesting work. From a theoretical standpoint, Cipolla’s
analysis is stronger than Ramón Carande’s, although it is not
completely adequate either, as it places more emphasis on the
crisis and credit squeeze than on the prior stage of artificial
credit expansion, wherein lies the true root of the evil. The
credit expansion phase, in turn, is rooted in the failure of
bankers to comply with the obligation to safeguard and main-
tain intact 100 percent of the tantundem.74
82
Money, Bank Credit, and Economic Cycles
74Cipolla indicates that in the 1570s, the Ricci Bank could no longer
meet demands for cash withdrawals and actually suspended payments,
only paying “in ink” or with bank policies. Florentine authorities
focused on just the symptoms of this worrisome situation and made the
typical attempt to resolve it with mere ordinances. They imposed upon
bankers the obligation to pay their creditors immediately in cash, but
they did not diagnose nor attack the fundamental source of the problem
(the misappropriation of deposits and channeling of them into loans
and the failure to maintain a 100-percent cash reserve). Consequently,
the decrees which followed failed to have the desired effect and the cri-
sis gradually worsened until it exploded violently in the mid-1570s. See
Cipolla, Money in Sixteenth-Century Florence, p. 107.
Of international relevance were the long-standing rela-
tions between Charles V and members of the prominent Fug-
ger banking family (known in Spain as the Fúcares). The Fug-
gers of Augsburg started out as wool and silver merchants and
also traded spices between their city and Venice. Later they
concentrated on banking, and in their heyday they operated
eighteen branches in different parts of Europe. They granted
loans to help finance the election of Charles V as emperor and
later funded his exploits on many occasions, receiving as col-
lateral both the silver shipments from the Americas and the
authorization to collect taxes. Their business came to a stand-
still and barely escaped bankruptcy in 1557 when Philip II de
facto suspended payments, and in fact they continued to lease
the lands belonging to military orders until 1634.75
THE SCHOOL OF SALAMANCA AND THE BANKING BUSINESS
These financial and banking phenomena did not go unno-
ticed by the illustrious minds of members of the School of
Salamanca who, according to the most reliable research,
paved the way for the modern subjectivist theory of value,
developed by the Austrian School of economics.76
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 83
75The best source on the relations between the Fugger Bank and Charles
V is arguably Ramón Carande’s Carlos V y sus banqueros. Also deserving
mention is a study by Rafael Termes Carreró, entitled Carlos V y uno de
sus banqueros: Jacobo Fugger (Madrid: Asociación de Caballeros del
Monasterio de Yuste, 1993). Rafael Termes makes an interesting obser-
vation about the Fuggers’ dominance in Spain, pointing out that
there is a street in Madrid named after the Fuggers. Calle de
Fúcar, between Atocha and Moratín streets, bears the his-
panized version of their last name. In addition, the word
fúcar is listed even today as meaning “rich and wealthy per-
son” in the Diccionario of the Spanish Royal Academy. (p. 25)
76The following authors, among others, have recently examined the
contributions of Spanish scholastics to economic theory: Murray N.
Rothbard, “New Light on the Prehistory of the Austrian School,” in The
Foundations of Modern Austrian Economics, Edwin G. Dolan, ed. (Kansas
City, Mo.: Sheed and Ward, 1976), pp. 52–74, and Economic Thought
Before Adam Smith, chap. 4, pp. 97–133; Lucas Beltrán, “Sobre los orí-
genes hispanos de la economía de mercado,” in Ensayos de economía
Chronologically speaking, the first work to consider,
and perhaps the most relevant to our thesis, is Instrucción de
mercaderes (Instruction to merchants), written by Doctor Luis
84
Money, Bank Credit, and Economic Cycles
política (Madrid: Unión Editorial, 1996), pp. 234–54; Marjorie Grice-
Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory
1544–1605 (Oxford: Clarendon Press, 1952), Early Economic Thought in
Spain 1177–1740 (London: George Allen and Unwin, 1978), and Economic
Thought in Spain: Selected Essays of Marjorie Grice-Hutchinson, Laurence S.
Moss and Christopher K. Ryan, eds. (Aldershot, England: Edward Elgar,
1993); Alejandro A. Chafuen, Christians for Freedom: Late-Scholastic Eco-
nomics (San Francisco: Ignatius Press, 1986); and Huerta de Soto, “New
Light on the Prehistory of the Theory of Banking and the School of Sala-
manca,” pp. 59–81. The intellectual influence of the School of Salamanca
on the Austrian School is not a mere coincidence or quirk of history, but
a consequence of the close historical, political and cultural connections
established between Spain and Austria during the time of Charles V and
his brother Ferdinand I. These ties lasted for several centuries, and Italy
played a crucial role in them, acting as a true cultural, economic and
financial link between the two furthermost tips of the Empire (Spain and
Vienna). (On this subject, we recommend Jean Bérenger’s interesting
book, A History of the Habsburg Empire, 1273–1700, C.A. Simpson, trans.
[London: Longman, 1994, pp. 133–35]). Nevertheless, the scholastics’
doctrine on banking has been largely overlooked in the above writings.
Marjorie Grice-Hutchinson does touch upon the topic with a near verba-
tim reproduction of Ramón Carande’s brief contribution to the matter
(see The School of Salamanca, pp. 7–8). Ramón Carande, in turn, simply
cites (on pp. 297–98 of volume 1 of his book, Carlos V y sus banqueros)
Tomás de Mercado’s reflections on banking. A more profound examina-
tion is made by Alejandro A. Chafuen, who at least reports Luis de
Molina’s views on banking and considers the extent to which the School
of Salamanca approved or disapproved of fractional-reserve banking.
Another relevant source is Restituto Sierra Bravo’s work, El pensamiento
social y económico de la Escolástica desde sus orígenes al comienzo del catoli-
cismo social (Madrid: Consejo Superior de Investigaciones Científicas,
Instituto de Sociología “Balmes,” 1975). Volume 1, pp. 214–37 includes a
rather biased interpretation of the views of members of the School of
Salamanca on the banking business. According to Sierra Bravo, some
among the School’s theorists (including Domingo de Soto, Luis de
Molina, and even Tomás de Mercado) tended to accept fractional-
reserve banking. However, he ignores the writings of other members of
the School who, on firmer theoretical grounds, held a radically oppos-
ing view. The same criticism can be applied to references Francisco G.
Camacho makes in his prefaces to the Spanish translations of Molina’s
works, particularly his “Introduction” to La teoría del justo precio
Saravia de la Calle and published in Medina del Campo in
1544. Saravia de la Calle criticizes bankers harshly, calling
them “voracious gluttons who swallow everything, destroy
everything, confuse everything, steal and soil everything, like
the harpies of Phineus.”77He says bankers “go out into the
street and square with their table and chair and cash-box and
book, like harlots to the brothel with their chair,” and having
obtained the necessary license and guarantee required by the
laws of the kingdom, they set about acquiring deposits from
clients, to whom they offer bookkeeping and cashier services,
making payments from clients’ accounts as ordered and even
paying interest on such deposits.
With sound legal reasoning, Saravia de la Calle indicates
that interest is incompatible with the nature of the monetary
deposit, and that in any case, the banker should receive a fee
for the custody and safekeeping of the money. He even
severely rebukes customers who enter into such deals with
bankers, and states:
And if you say, merchant, that you do not lend the money,
but that you deposit it, that is a greater mockery; for who
ever saw the depositary pay? He is usually paid for the trou-
ble of safeguarding the deposit. Furthermore, if you now
entrust your money to the profiteer as a loan or deposit, just
as you receive a part of the profit , you also earn a portion of
guilt, even a greater portion.78
In chapter 12 of his book, Saravia de la Calle makes a neat
distinction between the two radically different operations
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 85
(Madrid: Editora Nacional, 1981), esp. pp. 33–34. This version of the
doctrine, according to which some members of the School of Salamanca
accepted fractional-reserve banking, has been greatly influenced by an
article by Francisco Belda, S.J., entitled “Ética de la creación de créditos
según la doctrina de Molina, Lessio y Lugo,” published in Pensamiento
19 (1963): 53–89. For the reasons indicated in the text, we disagree with
the interpretation these authors make of the doctrine of the School of
Salamanca with respect to banking. We will consider these objections in
greater detail in section 1 of chapter 8.
77Saravia de la Calle, Instrucción de mercaderes, p. 180.
78Ibid., p. 181.
bankers carry out: demand deposits and time “deposits.” In
the first case, customers entrust their money interest-free to
bankers
so the money will be safer, and more accessible for making
payments, and to avoid the hassle and trouble of counting
and guarding it, and also because, in gratitude for this good
deed they do the moneylender in giving him their money, if
it so happens they have no money left under his charge, he
will also accept some overdrafts without interest.79
The second operation, the time “deposit,” is very different
from the first and is in fact a true loan or mutuum which is
granted the banker for a fixed term and yields interest. Saravia
de la Calle, in compliance with the traditional canonical doc-
trine on usury, condemns these transactions. Furthermore, he
clearly states that in the case of the demand-deposit contract,
customers should pay the banker
for if they deposit money, they should pay for the safekeep-
ing and should not derive as much profit as the laws permit
when depositing money or property that requires safe-
guarding.80
Saravia de la Calle goes on to censure those clients who self-
ishly try to capitalize on the illicit activity of bankers, making
deposits and expecting bankers to pay interest. As he vividly
puts it,
He who deposits his money with someone he knows will
not guard it, but will spend it, is not free from sin, at least
venial sin. He acts as one who turns over a virgin to a lecher
or a delicacy to a glutton.81
Moreover, the depositor cannot ease his conscience by
thinking the banker will loan or use other people’s money but
not his own.
86
Money, Bank Credit, and Economic Cycles
79Ibid., p. 195.
80Ibid., p. 196.
81Ibid., p. 197.
He believes the banker will probably guard the money he
deposits and not do business with it, when this cannot be
expected of any of these profiteers. On the contrary, the
banker will soon invest the deposit for profit and try to earn
money with it. How could bankers who pay 7 and 10 per-
cent interest to those who provide them with money to do
business with possibly refrain from using deposits? Even if
it had been clearly demonstrated that you do not sin (which
is not the case, quite the opposite), the moneylender very
certainly sins when he does business with your money and
he definitely uses your money to steal the property of your
neighbors.82
Saravia de la Calle’s doctrine is very coherent, inasmuch
as the self-interested use (via the granting of loans) of money
placed on demand deposit with bankers is illegitimate and
implies a grave sin. This doctrine coincides with the one orig-
inally established by the classical authors of Roman law, a
doctrine which derives naturally from the very essence, pur-
pose, and legal nature of the monetary irregular-deposit con-
tract, which we studied in chapter 1.
Saravia de la Calle also vividly describes the dispropor-
tionate profits bankers obtain through their illegitimate prac-
tice of appropriating deposits instead of being satisfied with
the more modest earnings they would receive for the simple
custody or safekeeping of deposits. His explanation is quite
descriptive:
If you receive a wage, it should be moderate and adequate
for your support, not the excessive loot with which you
build superb houses, buy lavish estates, pay servants and
provide extravagant luxuries for your families, and you give
great feasts and dress so splendidly, especially when you
were poor before you began your dealings, and you left
humble trades.83
In addition, Saravia de la Calle explains that bankers are
quite prone to bankruptcy, and he even carries out a cursory
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 87
82Ibid.
83Ibid., p. 186.
theoretical analysis which demonstrates that the expansionary
phase brought on by the artificial expansion of credit granted
by these “profiteers” is inevitably followed by a period of
recession, during which the non-payment of debts produces a
chain of bank failures. He adds that
the merchant does not pay the profiteer, he causes him to go
bankrupt, and he suspends payments and all is lost. As is
common knowledge, these moneylenders are the beginning,
occasion and even the cause of all this, because if they did not
exist, each person would use his money to the extent he could and
no more, and things would cost what they are worth and more
than a fair cash price would not be charged. Therefore it would
be very worthwhile for princes to stop tolerating these prof-
iteers in Spain, since no other nation in the world tolerates
them, and to banish this pestilence from their court and
kingdom.84
As we know, it is not true that the authorities of other
nations had controlled the activity of bankers more success-
fully than Spanish authorities. Instead, the same thing hap-
pened more or less everywhere, and rulers eventually granted
bankers privileges to allow them to make self-interested use of
their depositors’ money, in exchange for the ability to capital-
ize on a banking system which provided much faster and eas-
ier financing than taxes.
To conclude his analysis, Saravia de la Calle affirms that
a Christian should under no circumstances give his money
to these profiteers, because if he sins in doing so, as is
always the case, he should refrain from it to avoid sinning;
and if he does not sin, he should refrain to avoid causing the
moneylender to sin.
Furthermore, he adds that if bankers’ services are not used,
the following additional advantage will result: the depositors
will not be shocked if the moneylender suspends payments;
if he goes bankrupt, as we see so often and Our Lord God per-
mits, let him and his masters be lost like dishonest gains.85
88
Money, Bank Credit, and Economic Cycles
84Ibid., p. 190; italics added.
85Ibid., p. 198.
As we see, Saravia de la Calle’s analysis, along with his
cleverness and humor, is impeccable and free from contradic-
tions. However, in his criticism of bankers, he perhaps places
too much emphasis on the fact that they charged and paid
interest in violation of the canonical prohibition of usury,
instead of emphasizing that they misappropriated demand
deposits.
Another writer who examines the monetary irregular-
deposit contract is Martín de Azpilcueta, better known as
“Doctor Navarro.” In his book, Comentario resolutorio de cam-
bios (Resolutory commentary on exchanges), first published in
Salamanca at the end of 1556, Martín de Azpilcueta expressly
refers to “banking for safekeeping,” which consists of the
bank contract of monetary demand-deposit. For Martín de
Azpilcueta, banking for safekeeping, or the irregular deposit
contract, is fully just and means that the banker is
guardian, depositary and guarantor of the money given
him or exchanged for whatever purpose by those who give
or send him money, and that he is obliged to make pay-
ments to merchants or persons to whom depositors want
payments made in such and such a way, [for which] he
may legitimately charge a fair fee to the republic or the
depositors, as this trade and responsibility are useful to the
republic and free from iniquity; for it is fair for a worker to
earn his wages. And it is the moneychanger’s job to
receive, safeguard and keep the money of so many mer-
chants ready, and to write and keep their accounts, with
great difficulty and at times risk of error in their records
and in other things. This arrangement could be formalized
in a contract by which a person commits himself to hold
other people’s money in deposit, make payments and keep
records as arranged by them, etc., since this is an agree-
ment to hire a person for a job, which is a well-known, just
and blessed contract.86
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 89
86Martín de Azpilcueta, Comentario resolutorio de cambios (Madrid: Con-
sejo Superior de Investigaciones Científicas, 1965), pp. 57–58. In our
study of Dr. Navarro’s doctrines we have used the first Spanish edition,
As we see, Martín de Azpilcueta regards the monetary
irregular-deposit contract as a completely legitimate contract
by which people entrust the custody of their money to a pro-
fessional (the banker), who must safeguard it like a good par-
ent and keep it constantly available to the depositors, provid-
ing whatever cashier services they ask of him; and he has a
right to charge the depositors a fee for his services. As a mat-
ter of fact, Martín de Azpilcueta feels it is the depositors who
must pay the depositary or banker and never the reverse, so
depositors “pay in compensation for the trouble and worries
the moneychanger has in receiving and safeguarding their
money,” and bankers must conduct
their business honestly and be satisfied with a fair wage,
receiving it from those who owe it to them and whose
money they safeguard and whose accounts they keep, and
not from those who are not indebted to them.87
Moreover, in an effort to clarify matters and avoid confu-
sion, Martín de Azpilcueta (using the same reasoning as Doc-
tor Saravia de la Calle) expressly condemns clients who wish
to pay nothing for the custody of their deposits and try to even
earn interest on them. Doctor Navarro concludes that
in this sort of exchange, not only the moneychangers sin, but
also . . . those who entrust their money to them for safe-
keeping as above. They later refuse to pay a fee, claiming the
profits earned with their money and received from those
they pay in cash is enough of a wage. And if the money-
changers request a fee, the customers leave them and take
their business elsewhere. So, to keep these clients, the
bankers renounce their fee and instead take money from
those who owe them nothing.88
90
Money, Bank Credit, and Economic Cycles
published by Andrés de Portanarijs in Salamanca in 1556, as well as the
Portuguese edition, published by Ioam de Barreyra in Coimbra in 1560
and entitled Comentario resolutorio de onzenas. In this edition, the text cor-
responding to the above quotes appears on pp. 77–80.
87Azpilcueta, Comentario resolutorio de cambios, pp. 60–61.
88Ibid., p. 61.
In his book, Suma de tratos y contratos (Compilation of deals
and contracts) (Seville 1571), Tomás de Mercado performs an
analysis of the banking business very much in the same line as
the studies by the preceding authors. He begins by correctly
stating that depositors should pay bankers for the work of
safeguarding their monetary deposits, concluding that
it is a common, general rule among all bankers to be able to
take wages from those who deposit money in their bank, a
certain amount each year or for each thousand, because
bankers serve depositors and safeguard their assets.89
Nevertheless, Tomás de Mercado ironically points out that
bankers in Seville are so “generous” they charge nothing for
guarding deposits: “those of this city, it is true, are so regal and
noble they ask for and take no wage.”90Tomás de Mercado
observes that these bankers have no need to charge anything,
since the large amount of currency they obtain from deposits
earns them substantial profits in personal business deals. We
must emphasize that, in our opinion, Tomás de Mercado sim-
ply verifies a fact here and does not imply that he considers
these actions in any way legitimate, as various modern
authors (among others, Restituto Sierra Bravo and Francisco
G. Camacho) appear to suggest.91Quite the opposite is true.
From the standpoint of the purest Roman doctrine and the
essential legal nature of the monetary irregular-deposit con-
tract analyzed in chapter 1, Tomás de Mercado is the scholas-
tic writer who most clearly demonstrates that the transfer of
property in the irregular deposit does not imply a concomitant
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 91
89We quote the Instituto de Estudios Fiscales edition published in
Madrid in 1977, edited and prefaced by Nicolás Sánchez Albornoz, vol.
2, p. 479. Restituto Sierra Bravo has another edition, published by the
Editora Nacional in 1975. The above excerpt appears on page 401 of this
edition. The original edition was published in Seville in 1571 “en casa de
Hernando Díaz Impresor de Libros, en la calle de la Sierpe.”
90Mercado, Suma de tratos y contratos, vol. 2, p. 480 of the Instituto de
Estudios Fiscales edition and p. 401 of the Restituto Sierra Bravo edition.
91See the writings by Restituto Sierra Bravo, Francisco Belda, and Fran-
cisco García Camacho cited in footnote 76.
transfer of availability of the tantundem and therefore, for all
practical purposes, there is no full transfer of property. He
expresses himself quite well: “they [bankers] must under-
stand that the money is not theirs, but belongs to others; and
it is not fair that by using it, they cease to serve its owner.”
Tomás de Mercado adds that bankers should obey two funda-
mental principles. First: they should
not strip the bank so bare they cannot then cover the drafts
they receive, because if they become unable to pay them
because they have spent and invested the money in shady
business and other deals, they certainly sin. . . . Second: they
should not become involved in risky business deals, for they
sin even if the deals turn out successfully, because the
bankers chance not being able to fulfill their responsibilities
and doing serious harm to those who have trusted them.92
Though one could take these recommendations as an indi-
cation that Tomás de Mercado resigns to accept a certain frac-
tional reserve, it is important to keep in mind that he is very
emphatic in expressing his legal opinion that deposited
money does not ultimately belong to bankers but to deposi-
tors, and in stating, furthermore, that none of the bankers
complies with his two recommendations:
however, since when business goes well, in affluent circum-
stances, it is very difficult to bridle greed, none of them
takes heed of these warnings nor meets these conditions.93
For this reason, he considers the regulations enacted by the
Emperor Charles V in this respect to be very beneficial. They
prohibited bankers from carrying out personal business deals
and were aimed at eliminating the temptation to finance such
dealings indefinitely with money obtained from depositors.94
92
Money, Bank Credit, and Economic Cycles
92Mercado, Suma de tratos y contratos, vol. 2, p. 480 of the Instituto de
Estudios Fiscales edition and p. 401 of the Restituto Sierra Bravo edition.
93Ibid.
94Nueva Recopilación, law 12, title 18, book 5, enacted in Zamora on June
6, 1554 by Charles V, Queen Juana, and Prince Philip; it reads:
Also, at the end of chapter 4 of Suma de tratos y contratos,
Tomás de Mercado states that the bankers of Seville hold
deposits of money and precious metals belonging to merchants
who traded with the New World, and that with such consid-
erable deposits they “make great investments,” obtaining
hefty profits. Here he does not openly condemn these prac-
tices, but we must remember that the passage in question is,
again, more a description of a state of affairs than a judgment
on its legitimacy. However, he does consider the issue of legit-
imacy in greater depth in chapter 14, which we have already
covered. Tomás de Mercado concludes as well that bankers
are also involved in exchanging and charging; bankers in
this republic engage in an extremely wide range of activi-
ties, wider than the ocean, but sometimes they spread them-
selves too thin and all is lost.95
The scholastics most misguided in their doctrinal treat-
ment of the monetary irregular-deposit contract are Domingo
de Soto and (especially) Luis de Molina and Juan de Lugo.
Indeed, these theorists allowed themselves to be influenced
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 93
Because the public banks in the markets of Medina del
Campo, Rioseco and Villalón, and in the cities, towns and vil-
lages of these kingdoms . . . [have engaged in business other
than their specific task concerning money], they have as a
result suspended payments and failed; [in order to] avoid the
above-mentioned events, we decree that, from now on, they
confine themselves to their specific duty, and that not just one
person but at least two be required to establish these public
banks . . . and that before they . . . [can practice their profes-
sion], they must provide sufficient guarantees. (italics added)
Note that “public banks” refers here not to government banks but to pri-
vate banks which may receive deposits from the public under certain
conditions (at least two owners, sufficient guarantees, etc.). See José
Antonio Rubio Sacristán, “La fundación del Banco de Amsterdam (1609)
y la banca de Sevilla,” Moneda y crédito (March 1948).
95This is the quotation of Mercado which Ramón Carande includes in
vol. 1 of Carlos V y sus banqueros, in the introduction to his treatment of
bankers in Seville and the crisis that led them all to fail. See Mercado,
Suma de tratos y contratos, vol. 2, pp. 381–82 of the 1977 edition of the
Instituto de Estudios Fiscales and p. 321 of the Sierra Bravo edition.
by the medieval tradition of the glossators, which we covered
in section 2 of this chapter, and especially by the doctrinal con-
fusion resulting from the depositum confessatum. De Soto and
especially Molina view the irregular deposit as a loan in which
both the ownership and full availability of the tantundem are
transferred to the banker. Therefore, they believe the practice
of loaning deposited funds to third parties is legitimate, as
long as bankers act in a “prudent” manner. Domingo de Soto
could be considered the first to maintain this thesis, though he
did so very indirectly. In fact, in book 6, topic 11 of his work,
La justicia y el derecho (On justice and law) (1556), we read that
bankers have the
custom, it is said, of being liable for a greater amount of
money than that deposited if a merchant makes his deposit
in cash. I gave the moneychanger ten thousand; so he will be
liable to me for twelve, perhaps fifteen; because having cash
is very profitable for the moneychanger. Neither is any evil
seen in it.96
Another typical example of credit creation which
Domingo de Soto appears to accept is a loan in the form of the
discount of bills, financed using clients’ deposits.
Nevertheless, the Jesuit Luis de Molina is the scholar who
has most clearly maintained an erroneous doctrine on the
bank contract of monetary irregular deposit.97Indeed, in
94
Money, Bank Credit, and Economic Cycles
96
Habet autem praeterea istorum usus, ut fertur si mercatorum
quispiam in cambio numeratam pecuniam deponat, campsor
pro maio ri illius gratia respondeat. Numeravi campsori dece
milia: fide habebo apud ipsum & creditu pro duodecim, & for-
fam pro quim decim: qui capsori habere numerata pecuniam
bonum est lucrum. Neq, vero quicq vitij in hoc foedere
apparet. (Domingo de Soto, De iustitia et iure [Salamanca:
Andreas Portonarijs, 1556], book 6, topic 11, the only article,
p. 591. Instituto de Estudios Políticos edition [Madrid, 1968],
vol. 3, p. 591)
Sierra Bravo (El pensamiento social y económico de la Escolástica, p. 215) is
of the opinion that these words by Domingo de Soto imply his accept-
ance of fractional-reserve banking.
97It is very significant that various authors, including Marjorie Grice-
Hutchinson, hesitate to place Luis de Molina among the theorists of the
Tratado sobre los cambios (Treatise on exchanges) (1597), he
upholds the medieval doctrine that the irregular deposit is a
loan or mutuum contract in favor of the banker, a contract in
which not only ownership is transferred, but full availability of
the tantundem as well, which means the banker can legitimately
use the money in his own interest, in the form of loans or in any
other manner. Let us see how he presents his argument:
Because these bankers, like all the others, are true owners of
the money deposited in their banks, and they differ greatly in
this way from other depositaries . . . so they receive the money
as a precarious loan and hence, at their own risk.
Further on he indicates even more clearly that
such a deposit is really a loan, as has been said, and ownership
of the money deposited is transferred to the banker, so if it is
lost it is lost to the banker.98
This position conflicts with the doctrine Luis de Molina
himself upholds in Tratado sobre los préstamos y la usura (Treatise
on loans and usury), where he indicates that a term is an essen-
tial element of all loan contracts, and that if the duration of a
loan has not been expressly stipulated and a date for its return
set, “it will be necessary to accept the decision of the judge as
to the loan’s duration.”99Moreover, Luis de Molina ignores all
of the arguments presented in chapter 1 to demonstrate that
the irregular deposit contract has nothing in common, in
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 95
School of Salamanca: “The inclusion of Molina in the School seems to
me now to be more dubious.” Marjorie Grice-Hutchinson, “The Concept
of the School of Salamanca: Its Origins and Development,” chapter 2 of
Economic Thought in Spain: Selected Essays of Marjorie Grice-Hutchinson, p.
25. It seems clear that the core members of the School of Salamanca were
Dominican, and at least on banking matters it is necessary to separate
them from Jesuit theologians, a deviationist and much less rigorous
group.
98Luis de Molina, Tratado sobre los cambios, edited and introduced by
Francisco Gómez Camacho (Madrid: Instituto de Estudios Fiscales,
1991), pp. 137–40. The original edition was published in Cuenca in 1597.
99Luis de Molina, Tratado sobre los préstamos y la usura, edited and intro-
duced by Francisco Gómez Camacho (Madrid: Instituto de Estudios Fis-
cales, 1989), p. 13. The original edition was published in Cuenca in 1597.
terms of legal nature and essence, with the loan or mutuum
contract. Therefore, his doctrinal attempt to identify the two
contracts with each other is a clear step backward, not only in
relation to the much more coherent views of Saravia de la
Calle and Martin de Azpilcueta, but also with respect to the
true legal nature of the contract as it had already been devel-
oped by Roman juridical science. Therefore, it is strange that
a mind as bright and penetrating as Luis de Molina did not
realize the extreme danger of accepting the violation of the
general legal principles governing the irregular deposit, and
that he claimed,
it never occurs that all the depositors need their money in
such a way that they do not leave many thousands of ducats
deposited, with which the bankers can do business and
either earn a profit or suffer a loss.100
Molina does not recognize that in this way not only is the
objective or essential purpose of the contract (custody and
safekeeping) violated, but also that an incentive is provided
for all sorts of illicit dealings and abuses which inexorably
generate an economic recession and bank failures. When the
traditional legal principle requiring the continual safekeeping
of the tantundem in favor of the depositor is not respected, there
is no clear guide to avoiding bank failures. Furthermore, it is
obvious that such vague, superficial suggestions as “try to act
prudently” and “do not become involved in risky business
deals” are not sufficient help in preventing the very harmful
economic and social effects of fractional-reserve banking. At
any rate, Luis de Molina does at least bother to state,
It is important to warn that [bankers] commit mortal sin if
they use in their own business dealings so much of the
money they hold on deposit that they are later unable, at the
right time, to hand over the quantities the depositors request
or order to be paid against their deposited funds. . . . In
addition, they commit mortal sin if they become involved in
business dealings entailing a risk of not being able to return
deposits. For example, if they send so much merchandise
96
Money, Bank Credit, and Economic Cycles
100Molina, Tratado sobre los cambios, p. 137.
overseas that, should the ship sink or be captured by pirates,
they would not be able to repay deposits even after selling all
of their assets. And they are not guilty of mortal sin only when
the deal turns out poorly, but also when it turns out well. This is
due to the chance they take of hurting depositors and the guaran-
tors they themselves supply for the deposits.101
We find this warning of Luis de Molina admirable, but at
the same time we are astonished at his failure to recognize the
profound contradiction that ultimately exists between his
warning and his explicit acceptance of “prudent” fractional-
reserve banking. The fact is, regardless of how prudent
bankers are, the only surefire way to avoid risks and ensure
that deposits are permanently available to depositors is to
maintain a 100-percent reserve ratio at all times.102
Historical Violations of the Legal Principles
Governing the Monetary Irregular-Deposit Contract 97
101Ibid., pp. 138–39; italics added.
102After Molina, the leading scholar with a similar viewpoint on bank-
ing issues is Juan de Lugo, also a Jesuit. This suggests that, with regard
to banking, the School of Salamanca comprised two currents of thought:
one which was sound, doctrinally well-supported, close to the future
Currency School, and represented by Saravia de la Calle, Martín de
Azpilcueta, and Tomás de Mercado; and another, one more prone to the
follies of inflationism and to fractional-reserve banking, and close to the
future Banking School. Luis de Molina, Juan de Lugo, and to a much
lesser extent, Domingo de Soto exemplified this current. In chapter 8
we will set out this thesis in greater detail. For now we would just like
to point out that Juan de Lugo followed in Molina’s footsteps and gave
an especially clear warning to bankers:
Qui bene advertit, eivsmodi bancarios depositarios peccare
graviter, & damno subsequuto, cum obligatione restituendi
pro damno, quoties ex pecuniis apud se depositis tantam
summam ad suas negotiationes exponunt, ut inhabiles
maneant ad solvendum deposentibus, quando suo tempore
exigent. Et idem est, si negotiationes tales aggrediantur, ex
quibus periculum sit, ne postea ad paupertatem redacti pecu-
nias acceptas reddere non possint, v.g. si euenrus ex naviga-
tione periculosa dependeat, in qua navis hostium, vel
naufragij periculo exposita sit, qua iactura sequunta, ne ex
propio quidem patrimonio solvere possint, sed in creditorum,
vel fideiussorum damnum cedere debet. (R.P. Joannis de
Lugo Hispalensis, S.I., Disputationum de iustitia et iure tomus
secundus, Disp. 28, section 5 [Lyon: Sumptibus Petri Prost,
1642], pp. 406–07)
ليست هناك تعليقات:
إرسال تعليق