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

70 Money, Bank Credit, and Economic CyclesBANKING IN FLORENCE IN THE FOURTEENTH CENTURYAround the end of the twelfth and beginning of the thirteenthcenturies, Florence was the site of an incipient bankingindustry which gained great importance in the fourteenth century.The following families owned many of the most importantbanks: The Acciaiuolis, the Bonaccorsis, the Cocchis, theAntellesis, the Corsinis, the Uzzanos, the Perendolis, thePeruzzis, and the Bardis. Evidence shows that from the beginningof the fourteenth century bankers gradually began tomake fraudulent use of a portion of the money on demanddeposit, creating out of nowhere a significant amount ofexpansionary credit. 53 Therefore, it is not surprising that anincrease in the money supply (in the form of credit expansion)caused an artificial economic boom followed by a profound,inevitable recession. This recession was triggered not only byNeapolitan princes’ massive withdrawal of funds, but also byEngland’s inability to repay its loans and the drastic fall in thein effect, and contrary to the original plan, the banks becamecredit institutions, instruments for increasing the supplies ofa medium of exchange, or for imparting to the total stock ofmoney, an increased velocity of circulation, physical or virtual.Giro banking continued as before, though no actualstock of money existed to correspond with the total of depositcertificates. So long, however, as people continued to believethat the existence of money in the banks was a necessary conditionof the convertibility of the deposit certificates, theseloans had to remain a profound secret. If they were discoveredthe bank lost the confidence of the public and wasruined, especially if the discovery was made at a time whenthe Government was not in a position to repay the advances.(Wicksell, Lectures on Political Economy, vol. 2, pp. 74–75)53 Various articles have been written on this topic. See the interesting oneby Reinhold C. Mueller, “The Role of Bank Money in Venice,1300–1500,” in Studi Veneziani n.s. 3 (1979): 47–96, and chapter 5 of hisbook, The Venetian Money Market. Carlo M. Cipolla, in his notable publication,The Monetary Policy of Fourteenth-Century Florence (Berkeley: Universityof California Press, 1982), p. 13, also affirms: “The banks of thattime had already developed to the point of creating money besidesincreasing its velocity of circulation.”