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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 63Usher also highlights the failure of public officials at differentlevels to enforce sound banking practices, particularly a100-percent reserve requirement on demand deposits. Moreover,the authorities ended up granting banks a governmentlicense (a privilege—ius privilegium) to operate with a fractionalreserve. Banks were nevertheless required to guaranteedeposits. 44 At any rate, rulers were usually the first to takeadvantage of fraudulent banking, finding loans an easy sourceof public financing. It is as if bankers were granted the privilegeof making gainful use of their depositors’ money inreturn for their unspoken agreement that most of such use bein the shape of loans to public officials and funding for thegovernment. On various occasions, rulers went so far as tocreate government banks, in order to directly reap the considerableprofits available in banking. As we will see, Barcelona’sBank of Deposit, the Taula de Canvi, was created with this mainobjective.However, we cannot agree with the statement Usher makes immediatelyafterward; he contends that private banks also operating inBarcelona at the time must have had a much lower reserve ratio. Quitethe opposite must have been true. As private banks were smaller, theywould not have inspired as much confidence in the public as the municipalbank did, and as they operated in a strictly competitive environment,their cash reserves must have been higher (see pp. 181–82 ofUsher’s book). In any case, Usher concludes thatthere was considerable centralization of clearance in the earlyperiod and extensive credit creation. In the absence of comprehensivestatistical records, we have scarcely any basis foran estimate of the quantitative importance of credit in themedieval and early modern periods, though the implicationsof our material suggest an extensive use of credit purchasingpower. (Ibid., pp. 8–9)We will later cite works by C. Cipolla, which fully confirm Usher’s mainthesis. In chapter 4 we will examine bank multipliers in depth.44 In fifteenth-century Catalonia, guarantees were not required, thoughonly bankers who offered them were allowed to spread tablecloths overtheir counters. By this system, the public could easily identify the moresolvent businesses. Ibid., p. 17.