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

Additional Considerations on the Theory of the Business Cycle 481In chapter 2 we critically analyzed Cipolla’s use of themonetarist theory which underlies his interpretationof Florentine monetary processes.(b) The second economic crisis Cipolla has studied indepth can also be fully accounted for in terms of theAustrian theory of the business cycle. It involvescredit expansion which took place during the secondhalf of the sixteenth century in Florence. Specifically,Cipolla explains,the managers of the Ricci bank used the publicfunds as a monetary base for a policy of creditexpansion. The preeminence of the Ricci bank inthe Florentine market must have lured the otherbanks into emulating its policy of credit expansion.86According to Cipolla, during the 1560s the Florentineeconomy was quite active and was boosted by crediteuphoria. However at the beginning of the 1570s thesituation culminated in a severe liquidity squeezewhich affected the entire banking system. Bankers, asthe chroniclers colorfully put it, “only paid in ink.”The crisis gradually grew worse and then violentlyexploded in the mid-1570s, when a “great shortage ofmoney” (deflation) and a tightening of credit were feltin the city. Cipolla states,The credit multiplier suddenly worked perversely,and the Florentine market was throttledby a liquidity crisis, induced by the creditsqueeze, that was exceptionally serious both inintensity and length. In the chronicler’s pages, inthe merchants’ letters, and in the contemporarybans we find continual, concerned references tothe monetary and credit “stringency,” to thebanks that did not “count” (that is, did not pay86 Cipolla, Money in Sixteenth-Century Florence, p. 106.