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

82 Money, Bank Credit, and Economic Cyclesreverse in the second half of the sixteenth century, whendepositors nervously started to experience economic difficultiesand the most important Florentine banks began to fail.According to Cipolla, this phase of expansion was set inmotion in Italy by the directors of the Ricci Bank, who used avery large share of their deposits to buy government securitiesand grant loans. The other private banks were obliged toadopt the same policy of credit expansion if their managerswanted to be competitive and conserve their profits and marketshare. This process gave rise to a credit boom which led toa phase of great artificial expansion that soon began toreverse. In 1574, a proclamation accused bankers of refusing toreturn deposits in cash and denounced the fact that they only“paid with ink.” It became increasingly more difficult forthem to return deposits in ready cash, and Venetian citiesbegan to experience a significant money scarcity. Craftsmencould not withdraw their deposits nor pay their debts and asevere credit squeeze (i.e., deflation) followed, along with aserious economic crisis analyzed in detail by Cipolla in hisinteresting work. From a theoretical standpoint, Cipolla’sanalysis is stronger than Ramón Carande’s, although it is notcompletely adequate either, as it places more emphasis on thecrisis and credit squeeze than on the prior stage of artificialcredit expansion, wherein lies the true root of the evil. Thecredit expansion phase, in turn, is rooted in the failure ofbankers to comply with the obligation to safeguard and maintainintact 100 percent of the tantundem. 7474 Cipolla indicates that in the 1570s, the Ricci Bank could no longermeet demands for cash withdrawals and actually suspended payments,only paying “in ink” or with bank policies. Florentine authoritiesfocused on just the symptoms of this worrisome situation and made thetypical attempt to resolve it with mere ordinances. They imposed uponbankers the obligation to pay their creditors immediately in cash, butthey did not diagnose nor attack the fundamental source of the problem(the misappropriation of deposits and channeling of them into loansand the failure to maintain a 100-percent cash reserve). Consequently,the decrees which followed failed to have the desired effect and the crisisgradually worsened until it exploded violently in the mid-1570s. SeeCipolla, Money in Sixteenth-Century Florence, p. 107.