Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

60 Money, Bank Credit, and Economic CyclesThe end of the eleventh century and beginning of thetwelfth brought a moderate resurgence of business and trade,mainly among the Italian cities on the Adriatic (especiallyVenice), Pisa, and later, Florence. These cities specialized intrade with Constantinople and the Orient. Significant financialgrowth in these cities led to the revival of banking, and the patternwe observed in the classical world was reproduced.Indeed, bankers at first respected the juridical principles passeddown from Rome and conducted their business lawfully, avoidingillicit use of demand deposits (i.e., irregular deposits ofmoney). Only money received as loans (i.e., time “deposits”)was used or lent by bankers, and only during the agreed-uponterm. 38 Nevertheless, bankers again became tempted to takeadvantage of money from demand deposits. This was a gradualprocess which led to abuses and the resumption of fractionalreservebanking. The authorities were generally unable toenforce legal principles and on many occasions even grantedprivileges and licenses to encourage bankers’ improper activityand derive benefits from it, in the shape of loans and tax revenues.They even created government banks (such aslater formalized in 1494 by Luca Pacioli, the great Venetian monk andfriend of Leonardo da Vinci. A bank in Pisa used double-entry bookkeepingas early as 1336, as did the Masari family (tax collectors inGenoa) in 1340. The oldest European account book we have evidenceof came from a Florentine bank and dates back to 1211. See G.A. Lee,“The Oldest European Account Book: A Florentine Bank Ledger of1211,” in Accounting History: Some British Contributions, R.H. Parkerand B.S. Yamey, eds. (Oxford: Clarendon Press, 1994), pp. 160–96.38 In theory at least, early banks of deposit were not discountor lending banks. They did not create money but served asystem of 100 percent reserves, such as some monetariststoday would like to see established. Overdrafts were forbidden.In practice, the standards proved difficult to maintain,especially in face of public emergency. The Taula de Valenciawas on the verge of using its deposited treasure to buywheat for the city in 1567. Illegal advances were made to cityofficials in 1590 and illegal loans to the city itself on a numberof occasions. (Charles P. Kindleberger, A Financial Historyof Western Europe, 2nd ed. [Oxford: Oxford UniversityPress, 1993], p. 49)