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

480 Money, Bank Credit, and Economic Cyclesfollowing R.C. Mueller’s studies, 83 documented thesubstantial credit expansion Florentine banks broughtabout starting at the beginning of the fourteenth century.84 The result was a significant economic boomthat made Florence the center of financial and tradeactivity in the Mediterranean. Nonetheless a series ofevents, such as the bankruptcy in England, the withdrawalof funds in Naples, and the crash of Florentinetreasury bills triggered the beginning of the inevitablecrisis, which manifested itself in widespread bankfailure and a strong tightening of credit in the market(or as it was then known, mancamento della credenza).Cipolla points out that the crisis resulted in thedestruction of a great stock of wealth, and real estateprices, which had skyrocketed, plummeted to halftheir former value, and even such a reduction in pricewas insufficient to attract enough buyers. Accordingto Cipolla, it took thirty years (from 1349 to 1379) fora recovery to begin. In his opinion a major role in therecovery was played by the disastrous plague, whichbroke the vicious spiral of deflation. Since thenumber of capita was suddenly and dramaticallyreduced, the average per capita amount ofcurrency available rose. In addition, during thethree years that followed the plague, the outputof the mint remained high. Consequently, cashbalances were unusually large, and they werenot hoarded: the prevailing mood among thesurvivors was that of spending. Thus prices andwages increased. 8583 R.C. Mueller, “The Role of Bank Money in Venice: 1300–1500,” pp.47–96. And more recently, The Venetian Money Market: Bank, Panics, andthe Public Debt, 1200–1500.84 As Carlo Cipolla literally states: “The banks of that time had alreadydeveloped to the point of creating money besides increasing its velocityof circulation.” Cipolla, The Monetary Policy of Fourteenth-Century Florence,p. 13.85 Ibid., p. 48.