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

72 Money, Bank Credit, and Economic CyclesTHE MEDICI BANKThe history of the Medici Bank has come to light throughthe research and determination of Raymond de Roover, whosework was in turn advanced by the 1950 discovery of theMedici Bank’s confidential ledgers (libri segreti) in Florence’sArchivio di Stato. 57 The secrecy of these ledgers again betraysthe hidden, shameful nature of bankers’ activities (see footnote52), as well as the desire of many customers of Italian banks(nobles, princes, and even the Pope) to deposit their money insecret accounts. The discovery of these bank books was indeedfortunate, as they provide us with an in-depth understandingof how the Medici Bank operated in the fifteenth century.We must stress that the Medici Bank did not initiallyaccept demand deposits. At first it only took time deposits,which were actually true loans from the customer to the bank.These mutuum contracts were called depositi a discrezione. Thewords a discrezione indicated that, as these supposed“deposits” were really loans, the bank could make full useof them and invest them freely, at least for the length of thestipulated term. 58 Discrezione also referred to the interest the“shortage” of money is highly debatable, since money shortages tend tocorrect themselves spontaneously through a general drop in prices (viaa corresponding increase in the value of money) which makes it unnecessaryfor individuals to maintain such high cash balances. There is noneed for a war or plague to decimate the population. Even if there hadbeen no plague, once the investment errors made during the boom hadbeen corrected, the process of economic decline would have endedsooner or later, due to an increase in the value of money and a subsequentreduction in cash balances. This process undoubtedly coincidedwith, yet occurred independently of the Black Death’s effects. Hence,even the most educated and insightful historians, like Cipolla, clearlymake partial judgement errors in their interpretations when they do notuse the appropriate theoretical tools. At any rate, it is still very significantthat these defenders of an inflationary interpretation of history continueto point out the “positive effects” of wars and plagues and considerthem the key to recovery from economic crises.57 De Roover, The Rise and Decline of the Medici Bank, 1397–1494.58 The Medici Bank and its subsidiaries also accepted depositsfrom outsiders, especially great nobles, church dignitaries,