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

Historical Violations of the Legal PrinciplesGoverning the Monetary Irregular-Deposit Contract 81as soon as his withdrawal was completed. 72 It is unfortunatethat Ramón Carande uses such inadequate analytical toolsand that his interpretation of these bank failures derivesmainly from anecdotal information, such as the greed for metals,which constantly threatened banks’ solvency; bankers’daring personal business ventures (their involvement in thechartering of vessels, overseas merchant shipping, insurance,various types of speculation, etc.), which continually placedthem in serious predicaments; and the royal treasury’s repeatedconfiscation of valuables and its want of liquidity. He neveronce mentions the following chain of events: Fractional-reservebanking led to an artificial credit expansion unsupported bysufficient real savings; this, along with the inflation of preciousmetals from the Americas, generated an artificial boom; theboom, in turn, produced an economic crisis and inevitablerecession; and this was the true cause of the bank failures.Fortunately, Ramón Carande’s omission of theory has beenat least partially compensated for by Carlo M. Cipolla’s interpretativestudy of the economic and bank crisis of the secondhalf of the sixteenth century. Though this analysis refers strictlyto Italian banks, it is also directly applicable to the Spanishfinancial system, due to the intimate relationship existent at thetime between the financial and trade routes of the two countries.73 Cipolla explains that in the second half of the sixteenthcentury, the money supply (what we refer to today as M1 orM2) included a large amount of “bank money,” or deposits createdout of nowhere by bankers who did not maintain possessionof 100 percent of the cash on demand deposit. This gaverise to a period of artificial economic growth, which began to72 Eventually, after much effort, he was able to obtain around 200,000ducats, writing at the time, “I am afraid I will cause the failure of all thebanks in Seville.” See Carande, Carlos V y sus banqueros, vol. 1, pp.299–323, esp. pp. 315–16, which refer to Gresham’s visit to Seville.73 See Cipolla’s Money in Sixteenth-Century Florence (Berkeley: Universityof California Press, 1989), esp. pp. 101ff. The intimate financial and traderelationship between Spain and Italy in the sixteenth century is verywell documented in Felipe Ruiz Martín’s book, Pequeño capitalismo, grancapitalismo: Simón Ruiz y sus negocios en Florencia (Barcelona: EditorialCrítica, 1990).