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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 73bank paid clients who loaned it money in the form of time“deposits.”In his book, Raymond de Roover performs a thorough,detailed study of the development and vicissitudes of theMedici Bank through the century of its existence. For ourpurposes, it is only necessary to emphasize that at some pointthe bank began to accept demand deposits and to use a portionof them inappropriately as loans. The libri segreti documentthis fact. The accounts for March 1442 accompany eachdemand deposit entry with a note in the margin indicating thelikelihood that each depositor would claim his money. 59A balance sheet from the London branch of the MediciBank, dated November 12, 1477, shows that a significantnumber of the bank’s debts corresponded to demanddeposits. Raymond de Roover himself estimates that at onepoint, the bank’s primary reserves were down to 50 percentof total demand liabilities. 60 If we apply the standard criterionused by A.P. Usher, this implies a credit expansion ratioof twice the demand deposits received by the bank. There isevidence, however, that this ratio gradually worsened overthe bank’s life-span, especially after 1464, a year that markedthe beginning of growing difficulties for the bank. The rootsof the general economic and bank crisis that ruined theMedici Bank resemble those Carlo M. Cipolla identifies in hisstudy of fourteenth-century Florence. As a matter of fact,credit expansion resulting from bankers’ misappropriation ofdemand deposits gave rise to an artificial boom fed by theincrease in the money supply and its seemingly “beneficial”short-term effects. Nevertheless, since this process sprangfrom an increase in the money supply, namely creditcondottieri, and political figures, such as Philippe de Comminesand Ymbert de Batarnay. Such deposits were not usuallypayable on demand but were either explicitly or implicitlytime deposits on which interest, or rather discrezione,was paid. (De Roover, The Rise and Decline of the Medici Bank1397–1494, p. 101)59 Ibid., p. 213.60 Ibid., p. 245.