BANKING IN FLORENCE IN THE FOURTEENTH CENTURY

Around the end of the twelfth and beginning of the thirteenth centuries, Florence was the site of an incipient banking industry which gained great importance in the fourteenth century. The following families owned many of the most impor-
tant banks: The Acciaiuolis, the Bonaccorsis, the Cocchis, the Antellesis, the Corsinis, the Uzzanos, the Perendolis, the Peruzzis, and the Bardis. Evidence shows that from the beginning of the fourteenth century bankers gradually began to make fraudulent use of a portion of the money on demand deposit, creating out of nowhere a significant amount of expansionary credit. Therefore, it is not surprising that an increase in the money supply (in the form of credit expansion) caused an artificial economic boom followed by a profound,
inevitable recession. This recession was triggered not only by Neapolitan princes’ massive withdrawal of funds, but also by England’s inability to repay its loans and the drastic fall in the price of Florentine government bonds. In Florence, public debt had been financed by speculative new loans created out
of nowhere by Florentine banks. A general crisis of confidence occurred, causing all of the above banks to fail between 1341 and 1346. As could be expected, these bank failures were detrimental to all deposit-holders, who, after a prolonged period, received half, a third, or even a fifth of their deposits at most. Fortunately, Villani recorded the economic and financial events of this period in a chronicle that Carlo M. Cipolla has resurrected. According to Villani, the recession was accompanied by a tremendous tightening of credit (referred to descriptively as a mancamento della credenza, or “credit shortage”), which further worsened economic conditions and brought about a deluge of industry, workshop, and business failures. Cipolla has studied this economic recession
in depth and graphically describes the transition from economic boom to crisis and recession in this way: “The age of ‘The Canticle of the Sun’ gave way to the age of the Danse macabre.” In fact, according to Cipolla, the recession lasted
until, “thanks” to the devastating effects of the plague, which radically diminished the population, the supply of cash and credit money per capita approached its pre-crisis level and laid the foundation for a subsequent recovery.
 
THE MEDICI BANK
The history of the Medici Bank has come to light through the research and determination of Raymond de Roover, whose work was in turn advanced by the 1950 discovery of the Medici Bank’s confidential ledgers (libri segreti) in Florence’s Archivio di Stato. The secrecy of these ledgers again betrays
the hidden, shameful nature of bankers’ activities, as well as the desire of many customers of Italian banks (nobles, princes, and even the Pope) to deposit their money in secret accounts. The discovery of these bank books was indeed
fortunate, as they provide us with an in-depth understanding of how the Medici Bank operated in the fifteenth century.
We must stress that the Medici Bank did not initially accept demand deposits. At first it only took time deposits, which were actually true loans from the customer to the bank.
These mutuum contracts were called depositi a discrezione. The words a discrezione indicated that, as these supposed “deposits” were really loans, the bank could make full use of them and invest them freely, at least for the length of the stipulated term. Discrezione also referred to the interest the bank paid clients who loaned it money in the form of time “deposits.”
Raymond de Roover performs a thorough, detailed study of the development and vicissitudes of the Medici Bank through the century of its existence. For our
purposes, it is only necessary to emphasize that at some point the bank began to accept demand deposits and to use a portion of them inappropriately as loans. The libri segreti document this fact. The accounts for March 1442 accompany each demand deposit entry with a note in the margin indicating the likelihood that each depositor would claim his money.
A balance sheet from the London branch of the Medici Bank, dated November 12, 1477, shows that a significant number of the bank’s debts corresponded to demand deposits. Raymond de Roover himself estimates that at one point, the bank’s primary reserves were down to 50 percent of total demand liabilities. 60 If we apply the standard criterion used by A.P. Usher, this implies a credit expansion ratio of twice the demand deposits received by the bank. There is
evidence, however, that this ratio gradually worsened over the bank’s life-span, especially after 1464, a year that marked the beginning of growing difficulties for the bank. The roots of the general economic and bank crisis that ruined the
Medici Bank resemble those Carlo M. Cipolla identifies in his study of fourteenth-century Florence. As a matter of fact, credit expansion resulting from bankers’ misappropriation of demand deposits gave rise to an artificial boom fed by the increase in the money supply and its seemingly “beneficial” short-term effects. Nevertheless, since this process sprang from an increase in the money supply, namely credit unbacked by growth in real savings, the reversal of the
process was inevitable. This is exactly what happened in Italy’s large business centers in the second half of the fifteenth century. In terms of economic analysis, Raymond de Roover’s grasp of the historical process is unfortunately even shallower than Cipolla’s, and he even goes so far as to state, “what caused
these general crises remains a mystery.” However, it is not surprising that the Medici Bank eventually failed, as did the other banks that depended on fractional-reserve banking for a large part of their business. Though Raymond de Roover claims he does not understand what caused the general crisis at the end of the fifteenth century, his blow-by-blow historical account of the final stage of the Medici Bank reflects all of the typical indications of an inescapable recession and credit squeeze following a process of great artificial credit expansion. De Roover explains that the Medicis were forced to adopt a policy of credit restriction. They demanded the repayment of loans and attempted to increase the bank’s liquidity. Moreover, it has been demonstrated that in its final stage the Medici Bank was operating with a very low reserve ratio, which even dropped below 10 percent of total assets and was therefore inadequate to meet the bank’s obligations during the recession period. The Medici Bank eventually failed and all of its assets fell into the hands of its creditors. The bank’s competitors failed for the same reasons: the unavoidable effects of the artificial expansion and subsequent economic recession invariably generated by the violation of the traditional legal principles governing the monetary irregular deposit.

THE CANONICAL BAN ON USURY AND THE “DEPOSITUM CONFESSATUM”

The ban on usury by the three major monotheistic religions (Judaism, Islam and Christianity) did much to complicate and obscure medieval financial practices. Marjorie Grice-Hutchinson has carefully studied the medieval prohibition of
interest and its implications. She points out that Jews were not forbidden to loan money at interest to Gentiles, which explains why, at least during the first half of the medieval period, most bankers and financiers in the Christian world
were Jewish.
This canonical ban on interest added greatly to the intricacies of medieval banking, though not (as many theorists have insisted) because bankers, in their attempt to offer a useful, necessary service, were forced to constantly search for new ways to disguise the necessary payment of interest on loans.
When bankers loaned money received from clients as a loan (or “time” deposit), they were acting as true financial intermediaries and were certainly doing a legitimate business and significantly contributing to the productive economy of their time. Still, the belated recognition by the Church of the legitimacy of interest should not be regarded as overall approval of the banking business, but only as authorization for banks to loan money lent to them by third parties. In other words, to act as mere financial intermediaries. The evolution of Church
doctrine on interest in no way implies a sanction of fractional-reserve banking, i.e., bankers’ self-interested use (which usually means granting loans) of demand deposits.

To a great extent, the conceptual confusion we are dealing with arose in the Middle Ages as a result of the canonical ban on interest. One of the main artifices devised by economic agents to conceal actual interest-paying loans was to disguise them as demand deposits. Let us see how they did it. One of the most notable guidelines found for this contract in the Corpus Juris Civilis stipulated that, if the depositary were unable to return the deposit on demand, not only was he guilty of theft for misappropriation, but he was also obliged to pay interest to the depositor for his delay in repayment. Hence, it should come as no surprise that throughout the Middle Ages, in order to circumvent the canonical ban on interest, many bankers and depositors expressly declared that they had taken
part in a monetary irregular-deposit contract, when they had actually formalized a true loan or mutuum contract. The method of concealment to which this declaration belonged was aptly named depositum confessatum. It was a simulated deposit which, despite the declarations of the two parties, was not a true deposit at all, but rather a mere loan or mutuum contract. At the end of the agreed-upon term, the supposed depositor claimed his money. When the professed depositary failed to return it, he was forced to pay a “penalty” in the
shape of interest on his presumed “delay,” which had nothing to do with the actual reason for the “penalty” (the fact that the operation was a loan). Disguising loans as deposits became an effective way to get around the canonical ban on interest and escape severe sanctions, both secular and spiritual.
The depositum confessatum eventually perverted juridical doctrine on the monetary irregular deposit, robbing these tenets of the clarity and purity they received in classical Rome and adding confusion that has persisted almost to the present day. In fact, regardless of experts’ doctrinal stand (either strictly against, or “in favor” within reasonable limits) on interest-bearing loans, the different approaches to the depositum confessatum led theorists to stop distinguishing clearly between the monetary irregular deposit and the mutuum contract. On one hand, over-zealous canonists, determined to expose all hidden loans and condemn the corresponding interest, tended to automatically equate deposit contracts with mutuum contracts. They believed that by exposing the loan they assumed was behind every deposit they would put an end to the pretense of the depositum confessatum. This is precisely where their error lay: they regarded all deposits, even actual ones (made with the essential purpose of safeguarding the tantundem and keeping it always available to the deposi-
tor) as deposita confessata. On the other hand, those experts who were relatively more supportive of loans and interest and searched for ways to make them acceptable to the Church, defended the depositum confessatum as a kind of precarious loan which, according to the principles embodied in the Digest, justified the payment of interest.

As a result of both doctrinal stances, scholars came to believe that the “irregularity” in the monetary irregular deposit referred not to the deposit of a certain quantity of a fungible good (the units of which were indistinguishable from others of the same type and the tantundem of which was to be kept continually available to the depositor), but rather to the irregularity of always disguising loans as deposits. Further-more, bankers, who had used the depositum confessatum to disguise loans as deposits and to justify the illegal payment of interest, eventually realized that the doctrine which held that
deposits always concealed loans could also be extremely profitable to them, because they could employ it to defend even the misappropriation of money which had actually been placed into demand deposits and had not been loaned. Thus, the canonical ban on interest had the unexpected effect of obscuring Roman jurists’ clear, legal definition of the monetary irregular-deposit contract. Many capitalized on the ensuing confusion in an attempt to legally justify fraudulent banking and the misappropriation of demand deposits. Experts
failed to clear up the resulting legal chaos until the end of the nineteenth century.
Let us now examine three particular cases which together illustrate the development of medieval banking: Florentine banks in the fourteenth century; Barcelona’s Bank of Deposit, the Taula de Canvi, in the fifteen century and later; and the Medici Bank. These banks, like all of the most important banks in the late Middle Ages, consistently displayed the pattern we saw in Greece and Rome: banks initially respected the traditional legal principles found in the Corpus Juris Civilis, i.e., they operated with a 100-percent reserve ratio which guaranteed the safekeeping of the tantundem and its constant availability to the depositor. Then, gradually, due to bankers’ greed and rulers’ complicity, these principles began to be violated, and bankers started to loan money from demand deposits, often, in fact, to rulers. This gave rise to fractional-reserve banking and artificial credit expansion, which in the first stage appeared to spur strong economic growth. The whole process ended in a general economic crisis and the failure of banks that could not return deposits on demand once the recession hit and they had lost the trust of the public.
Whenever loans were systematically made from demand deposits, the historical constant in banking appears to have been eventual failure. Furthermore, bank failures were accompanied by a strong contraction in the money supply
(specifically, a shortage of loans and deposits) and by the resulting inevitable economic recession. As we will see in the following chapters, it took economic scholars nearly five centuries to understand the theoretical causes of all of these
processes.

BANKERS IN THE LATE MIDDLE AGES

The fall of the Roman Empire meant the disappearance of most of its trade and the feudalization of economic and social relationships. The enormous reduction in trade and in the division of labor dealt a definitive blow to financial activities,
especially banking. The effects of this reduction lasted several centuries. Only monasteries, secure centers of economic and social development, could serve as guardians of economic resources. It is important to mention the activity in this field of the Templars, whose order was founded in 1119 in Jerusalem to protect pilgrims. The Templars possessed significant financial resources obtained as plunder from their military campaigns and as bequests from feudal princes and lords. As they were active internationally (they had more than nine thousand
centers and two headquarters) and were a military and religious order, the Templars were safe custodians for deposits and had great moral authority, earning them the trust of the people. Understandably, they began to receive both regular and irregular deposits from individuals, to whom they charged a fee for safekeeping. The Templars also carried out transfers of funds, charging a set amount for transportation and protection. Moreover, they made loans of their own resources and did not violate the safekeeping principle on demand deposits. The order acquired a growing prosperity which aroused the fear and envy of many people, until Philip the Fair, the King of France, decided to dissolve it. He condemned those in charge to be burned at the stake (including Jacques de Molay, the Grand Maître), with the prime objective of appropriating all of the order’s riches.
The end of the eleventh century and beginning of the twelfth brought a moderate resurgence of business and trade, mainly among the Italian cities on the Adriatic (especially Venice), Pisa, and later, Florence. These cities specialized in trade with Constantinople and the Orient. Significant financial growth in these cities led to the revival of banking, and the pattern we observed in the classical world was reproduced. Indeed, bankers at first respected the juridical principles passed down from Rome and conducted their business lawfully, avoiding illicit use of demand deposits (i.e., irregular deposits of money). Only money received as loans (i.e., time “deposits”) was used or lent by bankers, and only during the agreed-upon term. Nevertheless, bankers again became tempted to take
advantage of money from demand deposits. This was a gradual process which led to abuses and the resumption of fractional-reserve banking. The authorities were generally unable to enforce legal principles and on many occasions even grantedprivileges and licenses to encourage bankers’ improper activity
and derive benefits from it, in the shape of loans and tax revenues. They even created government banks (such as Barcelona’s Bank of Deposit, or Taula de Canvi).
 
THE REVIVAL OF DEPOSIT BANKING IN MEDITERRANEAN EUROPE
Abbott Payson Usher, in his monumental work, The Early History of Deposit Banking in Mediterranean Europe, studies the gradual emergence of fractional-reserve banking during the late Middle ages, a process founded on the violation of this general legal principle: full availability of the tantundem must be preserved in favor of the depositor. According to Usher, it is not until the thirteenth century that some private bankers begin to use the money of their depositors to their own advantage, giving rise to fractional-reserve banking and the opportunities for credit expansion it entails. Moreover, and contrary
to a widely-held opinion, Usher believes this to be the most significant event in the history of banking, rather than the appearance of banks of issue (which in any case did not occur until much later, in the late seventeenth century). Although exactly the same economic effects result from the issuance of bank notes without financial backing and the loaning of funds from demand deposits, banking was historically shaped more by the latter of these practices than by the former. Usher states that: “the history of banks of issue has, until lately, obscured the importance of due deposit banking in all its forms, whether primitive or modern.” In an ironic reference to the undue importance given by economists to the problems of banks of issue versus the older but equally
harmful activities of deposit banks, he concludes that: the demand for currency, and the theoretical interests created by the problem, did much to foster misconceptions on the relative importance of notes and deposits. Just as French
diplomats “discovered” the Pyrenees in the diplomatic crisis of the eighteenth century, so banking theorists “discovered” deposits in the mid-nineteenth century.
Again and again, Usher shows that the modern banking system arose from fractional-reserve banking (itself the result of fraud and government complicity, as Usher illustrates in detail via the example of the late medieval Catalonian banking system), and not from banks of issue, which appeared much later.
Usher points out that the first banks in twelfth-century Genoa made a clear distinction in their books between demand deposits and “time” deposits, and recorded the latter as loans or mutuum contracts. However, bankers later began gradually to make self-interested use of demand deposits, giving rise to expansionary capabilities present in the banking system; more specifically, the power to create deposits and grant credits out of nowhere. Barcelona’s Bank of Deposit is a case in point. Usher estimates that the bank’s cash reserves amounted to 29 percent of total deposits. This meant their capacity for
credit expansion was 3.3 times their cash reserves.
Usher also highlights the failure of public officials at different levels to enforce sound banking practices, particularly a 100-percent reserve requirement on demand deposits. More-over, the authorities ended up granting banks a government license (a privilege—ius privilegium) to operate with a fractional reserve. Banks were nevertheless required to guarantee deposits. At any rate, rulers were usually the first to take advantage of fraudulent banking, finding loans an easy source of public financing. It is as if bankers were granted the privilege of making gainful use of their depositors’ money in return for their unspoken agreement that most of such use be in the shape of loans to public officials and funding for the government. On various occasions, rulers went so far as to create government banks, in order to directly reap the considerable profits available in banking. As we will see, Barcelona’s Bank of Deposit, the Taula de Canvi, was created with this main objective.

BANKING IN THE HELLENISTIC WORLD

The Hellenistic period, especially Ptolemaic Egypt, was a turning point in the history of banking because it marked the creation of the first government bank. The Ptolemies soon realized how profitable private banks were, and instead of
monitoring and cracking down on bankers’ fraudulent activities, decided to cash in on the overall situation by starting a government-run bank which would conduct business with the “prestige” of the state.

Although there was never a true government monopoly on banking, and private banks (mostly run by Greeks) continued to operate, Egypt’s prosperity secured a predominant role for the state bank. Rostovtzeff observes that the Ptolemaic bank also developed a sophisticated accounting system:
Refined accounting, based on a well-defined professional terminology, replaced the rather primitive accounting of fourth-century Athens.
Several archaeological studies show how widespread banking was during the Hellenistic period in Egypt. An incomplete document found in Tebtunis containing daily account records of a rural bank in the province of Heracleopolis shows the unexpectedly high number of villagers who, whether farmers or not, did business through banks and made payments out of their deposits and bank accounts. Relatively wealthy people were few, and most of the bank’s customers were retailers and indigenous craftspeople, linen merchants, textile workers, tailors, silversmiths and a tinker. Also, debts were often paid in gold and raw silver, following the ancient Egyptian tradition. Grain, oil and cattle dealers, as well as a butcher and many innkeepers were documented as
clients of the bank. The Ptolemaic government bank, private banks, and temples alike kept custody of different kinds of deposits. According to Rostovtzeff, bankers accepted both demand deposits and interest-paying time deposits. The latter were, in theory, invested in credit operations of various sorts—loans on collateral security, pledges, and mortgages, and a special very popular type—bottomry loans.
Private banks kept custody of their clients’ deposits while at the same time placing their own money in the government bank.
The main innovation of Egyptian banking was centralization: the creation of a government central bank in Alexandria, with branches in the most important towns and cities, so that private banks, when available, played a secondary role in the country’s economy. According to Rostovtzeff, this bank held custody of tax revenues and also took in private funds and deposits from ordinary clients, investing remaining funds in benefit of the state. Thus, it is almost certain that a fractional-reserve system was used and that the bank’s huge profits were
appropriated by the Ptolemies. Zeno’s letters provide ample information on how banks received money from their clients and kept it on deposit. They also tell us that Apollonius, the director of the central bank in Alexandria, made personal
deposits in different branches of the royal bank. All of these sources show how frequently individuals used the bank for making deposits as well as payments. In addition, due to their highly-developed accounting system, paying debts through
banks became extremely convenient, as there was an official record of transactions—an important piece of evidence in case of litigation.
The Hellenistic banking system outlived the Ptolemaic dynasty and was preserved during Roman rule with minor changes. In fact, Ptolemaic centralized banking had some influence on the Roman Empire: a curious fact is that Dio Cassius, in his well-known Maecenas speech, advocates the creation of a Roman government bank which would offer loans to everyone (especially landowners) at reasonable interest rates. The bank would draw its capital from earnings on all state-owned property. Dio Cassius’s proposal was never put into practice.

BANKING IN ROME
Since there are no Latin equivalents of the speeches by Isocrates and Demosthenes, Roman banks are not documented in as much detail as their Greek counterparts. However, we know from Roman law that banking and the monetary irregular deposit were highly developed, and we have already considered the regulations classical Roman jurists provided in this area. Indeed, Roman argentarii were not considered free to use the tantundem of deposits as
they pleased, but were obliged to safeguard it with the utmost diligence. This is precisely why money deposits did not pay interest and in theory were not to be lent, although the depositor could authorize the bank to use the money for making payments in his name. Likewise, bankers took in time “deposits,” which were actually loans to the bank or mutuum contracts. These paid interest and conferred upon bankers the right to use the funds as they thought fit for the duration of the agreed-upon term. References to these practices appear as
early as 350 B.C. in comedies such as Plautus’s Captivi, Asinaria and Mostellaria, and Terence’s Phormio, where we find delightful dialogues describing financial operations, clearings, account balances, the use of checks and so on. In any case, it appears the work done by professional jurists better regulated Roman banking and provided at least a clearer idea of what was and was not legitimate. However, this is no guarantee that bankers behaved honestly and refrained from using money from demand deposits to their own benefit. In fact, there is a rescript by Hadrianus to the merchants in Pergamum who complained about the illegal exactions and general dishonesty of their bankers. Also, a written document from the city of Mylasa to the emperor Septimius Severus contains a decree by the city council and the people aimed at regulating the activities of local bankers. All this suggests that, while perhaps less frequently than was common in the Hellenic world, there were in fact unscrupulous bankers who misappropriated their depositors’ funds and eventually went bankrupt.

THE FAILURE OF THE CHRISTIAN CALLISTUS’S BANK
A curious example of fraudulent banking is that of Callistus I, pope and saint (217–222 A.D.), who, while the slave of the Christian Carpophorus, acted as a banker in his name and took in deposits from other Christians. However, he went bankrupt and was caught by his master while trying to escape. He was finally pardoned at the request of the same Christians he had defrauded.
Refutatio omnium haeresium, a work attributed to Hippolytus and found in a convent on Mount Athos in 1844, reports Callistus’s bankruptcy in detail.29 Like the recurring crises which plagued Greece, the bankruptcy of Callistus occurred
after a pronounced inflationary boom followed by a serious confidence crisis, a drop in the value of money and the failure of multiple financial and commercial firms. These events took place between 185 and 190 A.D. under the rule of the Emperor Commodus.
Hippolytus relates how Callistus, at the time a slave to his fellow Christian Carpophorus, started a banking business in his name and took in deposits mainly from widows and Christians (a group that was already increasing in influence and membership). Nevertheless, Callistus deceitfully appropriated the money, and, as he was unable to return it upon demand, tried to escape by sea and even attempted suicide. After a series of adventures, he was flogged and sentenced to hard labor in the mines of Sardinia. Finally, he was miraculously released when Marcia, concubine of the Emperor Commodus and a Christian herself, used her influence. Thirty years later, a freedman, he was chosen the seventeenth Pope in the year 217 and eventually died a martyr when thrown into a well by pagans during a public riot on October 14, 222 A.D.
We can now understand why even the Holy Fathers in their Apostolic Constitutions have admonished bankers to be honest and to resist their many temptations. These moral exhortations warning bankers against temptation and reminding them of their duties were used constantly among early Christians, and some have even tried to trace them back to the Holy Scriptures.

BANKING IN GREECE AND ROME

In ancient Greece temples acted as banks, loaning money to individuals and monarchs. For religious reasons temples were considered inviolable and became a relatively safe refuge for money. In addition, they had their own militias to
defend them and their wealth inspired confidence in depositors. From a financial standpoint the following were among the most important Greek temples: Apollo in Delphi, Artemis in Ephesus, and Hera in Samos.

TRAPEZITEI OR GREEK BANKERS
Fortunately certain documentary sources on banking in Greece are available to us. The first and perhaps most important is Trapezitica,4 written by Isocrates around the year 393 B.C.5 It is a forensic speech in which Isocrates defends the
interests of the son of a favorite of Satyrus, king of Bosphorus.
The son accuses Passio, an Athenian banker, of misappropriating a deposit of money entrusted to him. Passio was an exslave of other bankers (Antisthenes and Archetratos), whose trust he had obtained and whose success he even surpassed, for which he was awarded Athenian citizenship. Isocrates’s
forensic speech describes an attempt by Passio to appropriate deposits entrusted to his bank by taking advantage of his depositor’s difficulties, for which he did not hesitate to deceive, forge, and steal contracts, bribe, etc. In any case, this
speech is so important to our topic that it is worth our effort to consider some of its passages in detail.
Isocrates begins his arguments by pointing out how hazardous it is to sue a banker, because deals with bankers are made without witnesses and the
injured parties must put themselves in jeopardy before such people, who have many friends, handle large amounts of money and appear trustworthy due to their profession.
It is interesting to consider the use bankers have always made of all of their social influence and power (which is enormous, given the number and status of figures receiving loans from them or owing them favors) to defend their privileges and continue their fraudulent activity.
Isocrates explains that his client, who was planning a trip, deposited a very large amount of money in Passio’s bank. After a series of adventures, when Isocrates’s client went to withdraw his money, the banker claimed he “was without funds at the moment and could not return it.” However, the banker, instead of admitting his situation, publicly denied the existence of any deposit or debt in favor of Isocrates’s client. When the client, greatly surprised by the banker’s behavior,
again claimed payment from Passio, he said to the banker, after covering his head, cried and said he had been forced by economic difficulties to deny my deposit but would soon try to return the money to me; he asked me to take pity on him and to keep his poor situation a secret so it would not be discovered he had committed fraud.
 
It is therefore clear that in Greek banking, as Isocrates indicates in his speech, bankers who received money for safe-keeping and custody were obliged to safeguard it by keeping it available to their clients. For this reason, it was considered fraud to employ that money for their own uses. Furthermore, the attempt to keep this type of fraud a secret so people would conserve their trust in bankers and the latter could continue their fraudulent activity is very significant. Also, we may deduce from Isocrates’s speech that for Passio this was not an isolated case of fraud, an attempt to appropriate the money of a client under favorable circumstances, but that he had difficulty returning the money because he had not maintained a 100-percent reserve ratio and had used the deposited money in private business deals, and he was left with no other “escape” than to publicly deny the initial existence of the deposit.
Isocrates continues his speech with more words from his client, who states:
Since I thought he regretted the incident, I compromised and told him to find a way to return my money while saving face himself. Three days later we met and both promised to keep what had happened a secret; (he broke his promise,
as you will find later in my speech). He agreed to sail with me to Pontus and to return the gold to me there, in order to cancel the contract as far from this city as possible; that way, no one from here would find out the details of the cancella-
tion, and upon sailing back, he could say whatever he chose.
Nevertheless, Passio denies this agreement, causes the disappearance of the slaves who had been witnesses to it and forges and steals the documents necessary to try to demonstrate that the client had a debt with him instead of a deposit. Given the secrecy in which bankers performed most of their activities, and the secret nature of most deposits, witnesses were not used, and Isocrates was forced to present indirect witnesses who knew the depositor had taken a large amount of money and had used Passio’s bank. In addition, the witnesses knew that at the time the deposit was made the depositor had changed more than one thousand staters into gold.
Furthermore, Isocrates claims that the point most likely to convince the judges of the deposit’s existence and of the fact that Passio tried to appropriate it was that Passio always refused to turn over the slave who knew of the deposit, for interrogation under torture. What stronger evidence exists in contracts with bankers? We do not use witnesses with them.
Though we have no documentary evidence of the trial’s verdict, it is certain that Passio was either convicted or arrived at a compromise with his accuser. In any case, it appears that afterward he behaved properly and again earned the trust of the city. His house was inherited by an old slave of his, Phormio, who successfully took over his business.
More interesting information on the activity of bankers in Greece comes from a forensic speech written by Demosthenes in favor of Phormio. Demosthenes indicates that, at the time of Passio’s death, Passio had given fifty talents in loans still outstanding, and of that amount, “eleven talents came from bank deposits.” Though it is unclear whether these were time or demand deposits, Demosthenes adds that the banker’s profits were “insecure and came from the money of others.” Demosthenes concludes that “among men who work with money, it
is admirable for a person known as a hard worker to also be honest,” because “credit belongs to everyone and is the most important business capital.” In short, banking was based on depositors’ trust, bankers’ honesty, on the fact that bankers should always keep available to depositors money placed in demand deposits, and on the fact that money loaned to bankers for profit should be used as prudently and sensibly as possible. In any case, there are many indications that Greek bankers did not always follow these guidelines, and that they used for themselves money on demand deposit, as described by Isocrates in Trapezitica and as Demosthenes reports of other bankers (who went bankrupt as the result of this type of activity) in his speech in favor of Phormio. This is true of Aristolochus, who owned a field “he bought while owing money to many people,” as well as of Sosynomus, Timodemus, and others who went bankrupt, and “when it was necessary to pay those to whom they owed money, they all suspended payments and surrendered their assets to creditors.”
Demosthenes wrote other speeches providing important information on banking in Greece. For example, in “Against Olympiodorus, for Damages,”12 he expressly states that a certain Como placed some money on demand deposit in the bank of Heraclides, and the money was spent on the burial and other ritual ceremonies and on the building of the funerary monument.

In this case, the deceased made a demand deposit which was withdrawn by his heirs as soon as he died, to cover the costs of burial. Still more information on banking practices is offered in the speech “Against Timothy, for a Debt,” in which
Demosthenes affirms that bankers have the custom of making entries for the amounts they hand over, for the purpose of these funds, and for deposits people make, so that the amounts given out and those deposited are recorded for use when balancing the books.
This speech, delivered in 362 B.C., is the first to document that bankers made book entries of their clients’ deposits and withdrawals of money.14 Demosthenes also explains how checking accounts worked. In this type of account, banks
made payments to third parties, following depositors’ instructions.15 As legal evidence in this specific case, Demosthenes adduced the bank books, demanded copies be made, and after showing them to Phrasierides, I allowed him to inspect the books and make note of the amount owed by this individual.
Finally, Demosthenes finishes his speech by expressing his concern at how common bank failures were and the people’s great indignation against bankers who went bankrupt.
Demosthenes mistakenly attributes bank failures to men who in difficult situations request loans and believe that credit should be granted them based on their reputation; however, once they recover economically, they do not repay the
money, but instead try to defraud.
We must interpret Demosthenes’s comment within the context of the legal speech in which he presents his arguments. The purpose of the speech was precisely to sue Timothy for not returning a bank loan. It would be asking too much to expect Demosthenes to have mentioned that most bank failures occurred because bankers violated their obligation to safeguard demand deposits, and they used the money for themselves and put it into private business deals up to the point when, for some reason, the public lost trust in them and tried to withdraw their deposits, finding with great indignation that the money was not available.
On various occasions research has suggested Greek bankers usually knew they should maintain a 100-percent reserve ratio on demand deposits. This would explain the lack of evidence of interest payments on these deposits, as well as
the proven fact that in Athens banks were usually not considered sources of credit.18 Clients made deposits for reasons of safety and expected bankers to provide custody and safekeeping, along with the additional benefits of easily-documented cashier services and payments to third parties. Nevertheless,
the fact that these were the basic principles of legitimate banking did not prevent a large group of bankers from yielding to the temptation to (quite profitably) appropriate deposits, a fraudulent activity which was relatively safe as long as people retained their trust in bankers, but in the long run it was des-
tined to end in bankruptcy. Moreover, as we will illustrate with various historical examples, networks of fraudulent bankers operating, against general legal principles, with a fractional-reserve ratio bring about credit expansion unbacked
by real savings, leading to artificial, inflationary economic booms, which finally revert in the shape of crises and economic recessions, in which banks inexorably tend to fail.
Raymond Bogaert has mentioned the periodic crises affecting banking in ancient Greece, specifically the economic and financial recessions of 377–376 B.C. and 371 B.C., during which the banks of Timodemus, Sosynomus and Aristolochus
(among others) failed. Though these recessions were triggered by the attack of Sparta and the victory of Thebes, they emerged following a clear process of inflationary expansion in which fraudulent banks played a central part.
Records also reflect the serious banking crisis which took place in Ephesus
following the revolt against Mithridates. This crisis motivated authorities to grant the banking industry its first express, historically-documented privilege, which established a ten-year deferment on the return of deposits.
In any case, the bankers’ fraudulent activity was extremely “profitable” as long as it was not discovered and banks did not fail. We know, for example, that the income of Passio reached 100 minas, or a talent and two-thirds. Professor Trigo
Portela has estimated that this figure in kilograms of gold would be equivalent today to almost two million dollars a year. This does not seem an extremely large amount, though it was really quite spectacular, considering most people lived at mere subsistence level, ate only once a day and had a diet of cereals and vegetables. Upon his death, Passio’s fortune amounted to sixty talents; given a constant value for gold, this would add up to nearly forty-four million dollars.

THE IRREGULAR DEPOSIT CONTRACT UNDER ROMAN LAW

The deposit contract in general is covered in section 3 of book 16 of the Digest, entitled “On Depositing and Withdrawing” (Depositi vel contra). Ulpian begins with the following definition:
A deposit is something given another for safekeeping. It is so called because a good is posited [or placed]. The preposition de intensifies the meaning, which reflects that all obligations corresponding to the custody of the good belong to that person.
A deposit can be either regular, in the case of a specific good; or irregular, in the case of a fungible good.34 In fact, in number 31, title 2, book 19 of the Digest, Paul explains the difference between the loan contract or mutuum and the deposit contract of a fungible good, arriving at the conclusion that if a person deposits a certain amount of loose money, which he counts and does not hand over sealed or enclosed in something, then the only duty of the person receiving it is to return the same amount.
In other words, Paul clearly indicates that in the monetary irregular deposit the depositary’s only obligation is to return the tantundem: the equivalent in quantity and quality of the original deposit. Moreover, whenever anyone made an irreg-
ular deposit of money, he received a written certificate or deposit slip. We know this because Papinian, in paragraph 24, title 3, book 16 of the Digest, says in reference to a monetary irregular deposit, I write this letter by hand to inform you, so that you will know, that the one hundred coins you have entrusted to me today through Sticho, the slave and administrator, are in my possession and I will return them to you immediately, whenever and wherever you wish.
This passage reveals the immediate availability of the money to the depositor and the custom of giving him a deposit slip or receipt certifying a monetary irregular deposit, which not only established ownership, but also had to be pre-
sented upon withdrawal.

The essential obligation of depositaries is to maintain the tantundem constantly available to depositors. If for some reason the depositary goes bankrupt, the depositors have absolute privilege over any other claimants, as Ulpian skillfully explains (paragraph 2, number 7, title 3, book 16 of the Digest):
Whenever bankers are declared bankrupt, usually addressed first are the concerns of the depositors; that is, those with money on deposit, not those earning interest on money left with the bankers. So, once the goods have been
sold, the depositors have priority over those with privileges, and those who received interest are not taken into account— it is as if they had relinquished the deposit.
Here Ulpian indicates as well that interest was considered incompatible with the monetary irregular deposit and that when bankers paid interest, it was in connection with a totally different contract (in this case, a mutuum contract or loan to a banker, which is better known today as a time “deposit” contract).
As for the depositary’s obligations, it is expressly stated in the Digest (book 47, title 2, number 78) that he who receives a good on deposit and uses it for a purpose other than that for which it was received is guilty of theft. Celsus also tells us in the same title (book 47, title 2, number 67) that taking a deposit with an intent to deceive constitutes theft. Paul defines theft as “the fraudulent appropriation of a good to gain a profit, either from the good itself or from its use or possession; this is forbidden by natural law.” As we see, what is today called the crime of misappropriation was included under the definition of theft in Roman law. Ulpian, in reference to Julianus, also concluded:
if someone receives money from me to pay a creditor of mine, and, himself owing the same amount to the creditor, pays him in his own name, he commits theft. (Digest, book 47, title 2, number 52, paragraph 16)
In number 3, title 34 (on “the act of deposit”), book 4 of the Codex Constitutionum of the Corpus Juris Civilis, which includes the constitution established under the consulship of Gordianus and Aviola in the year 239, the obligation to maintain the total availability of the tantundem is even clearer, as is the commission of theft when the tantundem is not kept available. In this constitution, the emperor Gordianus indicates to Austerus, if you make a deposit, you will with reason ask to be paid interest, since the depositary should thank you for not holding him responsible for theft, because he who knowingly and willingly uses a deposited good for his own benefit, against the will of the owner, also commits the crime of theft.
Section 8 of the same source deals expressly with depositaries who loan money received on deposit, thus using it for their own benefit. It is emphasized that such an action violates the principle of safekeeping, obligates depositaries to pay
interest, and makes them guilty of theft, as we have just seen in the constitution of Gordianus. In this section we read:
If a person who has received money from you on deposit loans it in his own name, or in the name of any other person, he and his successors are most certainly obliged to carry out the task accepted and to fulfill the trust placed in them.
It is recognized, in short, that those who receive money on deposit are often tempted to use it for themselves. This is explicitly acknowledged elsewhere in the Corpus Juris Civilis (Novellae, Constitution LXXXVIII), along with the importance of properly penalizing these actions, not only by charging the depositary with theft, but also by holding him responsible for payment of interest on arrears “so that, in fear of these penalties, men will cease to make evil, foolish and perverse use of deposits.”
Roman jurists established that when a depositary failed to comply with the obligation to immediately return the tantundem upon request, not only was he clearly guilty of the prior crime of theft, but he was also liable for payment of interest on arrears. Accordingly, Papinian states:
He who receives the deposit of an unsealed package of money and agrees to return the same amount, yet uses this money for his own profit, must pay interest for the delay in returning the deposit.
This perfectly just principle is behind the so-called depositum confessatum, which we will consider in greater detail in the next chapter and refers to the evasion of the canonical prohibition on interest by disguising actual loan or mutuum contracts as irregular deposits and then deliberately delaying repay-
ment, thus authorizing the charging of interest. If these contracts had from the beginning been openly regarded as loan or mutuum contracts they would not have been permitted by canon law.
Finally, we find evidence in the following extracts (among others) that Roman jurists understood the essential difference between the loan or mutuum contract and the monetary irregular-deposit contract: number 26, title 3, book 16 (passage by Paul); number 9, point 9, title 1, book 12 of the Digest (excerpts
by Ulpian); and number 10 of the same title and book. However, the clearest and most specific statements to this effect were made by Ulpian in section 2, number 24, title 5, book 17 of the Digest, in which he expressly concludes that “To loan is
one thing and to deposit is another,” and establishes that once a banker’s goods have been sold and the concerns of the privileged attended to, preference should be given people who, according to attested documents, deposited money in the bank. Nevertheless, those who have received interest from the bankers on money deposited will not be dealt with separately from the rest of the creditors; and with good reason, since to loan is one thing and to deposit is another.
It is therefore clear from Ulpian’s writings in this section that bankers carried out two different types of operations. On one hand, they accepted deposits, which involved no right to interest and obliged the depositary to maintain the full, continuous availability of the tantundem in favor of the depositors, who had absolute privilege in the case of bankruptcy.
And, on the other hand, they received loans (mutuum contracts), which did obligate the banker to pay interest to the lenders, who lacked all privileges in the case of bankrupcy. Ulpian could show no greater clarity in his distinction
between the two contracts nor greater fairness in his solutions.
Roman classical jurists discovered and analyzed the universal legal principles governing the monetary irregular-deposit contract, and this analysis coincided naturally with the development of a significant business and trade economy,
in which bankers had come to play a very important role. In addition, these principles later appeared in the medieval legal codes of various European countries, including Spain, despite the serious economic and business recession resulting from the fall of the Roman Empire and the advent of the Middle Ages. In Las Partidas (law 2, title 3, item 5) it is established that a person who agrees to hold the commodities of another takes part in an irregular deposit in which control over the goods is transferred to him. Nevertheless, he is obliged, depending upon agreements in the corresponding document, to return the goods or the value indicated in the contract for each good removed from the deposit, either because it is sold with the authorization of the original owner, or is removed for other, unexpected reasons. Moreover, in the Fuero Real (law 5, title
15, book 3) the distinction is made between the deposit “of some counted money or raw silver or gold,” received from “another, by weight,” in which case “the goods may be used and goods of the same quantity and quality as those received
may be returned;” and the deposit “which is sealed and not counted or measured by weight,” in which case “it is not to be used, but if it is used, it must be paid back double.” These medieval codes contain a clear distinction between the regular deposit of a specific good and the irregular deposit of money, and they indicate that in the latter case ownership is transferred. However, the codes do not include the important clarifications made in the Corpus Juris Civilis to the effect that, though ownership is “transferred,” the safekeeping obligation remains, along with the responsibility to keep continually available to the depositor the equivalent in quantity and quality (tantundem) of the original deposit. Perhaps the reason for this omission lies in the increasing prevalence of the depositum confessatum.
In conclusion, Roman legal tradition correctly defined the institution of monetary irregular deposit and the principles governing it, along with the essential differences between this contract and other legal institutions or contracts, such as the loan or mutuum.

MONETARY IRREGULAR-DEPOSIT CONTRACT

THE EMERGENCE OF TRADITIONAL LEGAL PRINCIPLES ACCORDING TO MENGER, HAYEK, AND LEONI
The traditional, universal legal principles we dealt with in the last section in relation to the irregular deposit contract have not emerged in a vacuum, nor are they the result of a priori knowledge. The concept of law as a series of rules and
institutions to which people constantly, perpetually and customarily adapt their behavior has been developed and refined through a repetitive, evolutionary process. Perhaps one of Carl Menger’s most important contributions was the development of a complete economic theory of social institutions.
According to his theory, social institutions arose as the result of an evolutionary process in which innumerable human beings interact, each one equipped with his own small personal heritage of subjective knowledge, practical experiences,
desires, concerns, goals, doubts, feelings, etc. By means of this spontaneous evolutionary process, a series of behavior patterns or institutions emerges in the realms of economics and language, as well as law, and these behaviors make life in society possible. Menger discovered that institutions appear through a social process composed of a multiplicity of human actions, which is always led by a relatively small group of individuals who, in their particular historical and geographical circumstances, are the first ones to discover that certain patterns of behavior help them attain their goals more efficiently. This discovery initiates a decentralized trial and error process encompassing several generations, in which the most effective behavior patterns gradually become more widespread as they successfully counter social maladjustments.
Thus there is an unconscious social process of learning by imitation which explains how the pioneering behavior of these most successful and creative individuals catches on and eventually extends to the rest of society. Also, due to this evolutionary process, those societies which first adopt successful principles and institutions tend to spread and prevail over other social groups. Although Menger developed his theory in relation to the origin and evolution of money, he also mentions that the same essential theoretical framework can be easily
applied to the study of the origins and development of language, as well as to our present topic, juridical institutions.
Hence the paradoxical fact that the moral, juridical, economic and linguistic institutions which are most important and essential to man’s life in society are not of his own creation, because he lacks the necessary intellectual might to assimilate the vast body of random information that these institutions
generate. On the contrary, these institutions inevitably and spontaneously emanate from the social processes of human interaction which Menger believes should be the main subject of research in economics.
Menger’s ideas were later developed by F.A. Hayek in various works on the fundamentals of law and juridical institutions, and especially by the Italian professor of political science, Bruno Leoni, who was the first to incorporate the following in a synoptic theory on the philosophy of law: the economic theory of social processes developed by Menger and the Austrian school, the most time-honored Roman legal tradition, and the Anglo-Saxon tradition of rule of law. Indeed, Bruno Leoni’s great contribution is having shown that the
Austrian theory on the emergence and evolution of social institutions is perfectly illustrated by the phenomenon of common law and that it was already known and had been formulated by the Roman classical school of law. Leoni, citing
Cicero’s rendering of Cato’s words, specifically points out that Roman jurists knew Roman law was not the personal invention of one man, but rather the creation of many over generations and centuries, given that there never was in the world a man so clever as to foresee everything and that even if we could concentrate all brains into the head of one man, it would be impossible for him to provide for everything at one time without having the experience that comes from practice through a long period of history.
In short, it was Leoni’s opinion that law emerges as the result of a continuous trial-and-error process, in which each individual takes into account his own circumstances and the behavior of others and the law is perfected through a selective evolutionary process.

ROMAN JURISPRUDENCE
The greatness of classical Roman jurisprudence stems precisely from the realization of this important truth on the part of legal experts and the continual efforts they dedicated to study, interpretation of legal customs, exegesis, logical analysis, the tightening of loopholes and the correction of flaws; all of which they carried out with the necessary standards of prudence and equanimity. The occupation of classical jurist was a true art, of which the constant aim was to identify and define the essence of the juridical institutions that have developed throughout society’s evolutionary process. Furthermore, classical jurists never entertained pretensions of being “original” or “clever,” but rather were “the servants of certain fundamental principles, and as Savigny pointed out, herein lies their greatness.” Their fundamental objective was to discover the universal principles of law, which are unchanging and inherent in the logic of human relationships. It is true, however, that social evolution itself often necessitates the application of these unchanging universal principles to new situations and problems arising continually from this evolutionary process. In addition, Roman jurists worked independently and were not civil servants. Despite multiple
attempts by official legal experts in Roman times, they were never able to do away with the free practice of jurisprudence, nor did the latter lose its enormous prestige and independence. Jurisprudence, or the science of law, became an independent profession in the third century B.C. The most important jurists prior to our time were Marcus Porcius Cato and his son Cato Licianus, the consul Mucius Scaevola, and the jurists Quintus Mucius Scaevola, Servius Surpicius Rufus, and Alfenus Varus. Later, in the second century A.D., the classical era began and the most important jurists during that time were Gaius, Pomponius, Africanus, and Marcellus. In the third century their example was followed by Papinian, Paul, Ulpian, and Modestinus, among other jurists. From this time
onward, the solutions offered by these independent jurists received such great prestige that the force of law was attached to them; and to prevent the possibility of difficulties arising from differences of opinion in the jurists’ legal writings, the force of law was given to the works of Papinian, Paul, Ulpian,
Gaius, and Modestinus, and to the doctrines of jurists cited by them, as long as these references could be confirmed upon comparison with original writings. If these authors were in disagreement, the judge was compelled to follow the doctrine defended by the majority; and in the case of a tie, the opinion of Papinian was to prevail. If he had not communicated his opinion on an issue, the judge was free to decide.
Roman classical jurists deserve the credit for first discovering, interpreting, and perfecting the most important juridical institutions that make life in society possible, and as we will see, they had already recognized the irregular deposit
contract, understood the essential principles governing it. The irregular deposit contract is not an intellectual, abstract creation. It is a logical outcome of human nature as expressed in multiple acts of social interaction and coopera-
tion, and it manifests itself in a set of principles which cannot be violated without grave consequences to the network of human relationships. The great importance of law in this evolutionary sense, distilled and rid of its logical flaws through the science of legal experts, lies in the guidance it provides people in their daily lives; though in most cases, due to its abstract nature, people may not be able to identify or understand the complete specific function of each juridical institution. Only recently in the historical evolution of human thought has it been possible to understand the laws of social processes and gain a meager grasp on the role of the different juridical institutions in society, and the contributions of
economics have been mostly responsible for these realizations. One of our most important objectives is to carry out an economic analysis of social consequences resulting from the violation of the universal legal principles regulating the mon-
etary irregular-deposit contract.
The knowledge we have today of universal legal principles as they were discovered by Roman jurists comes to us through the work of the emperor Justinian, who in the years 528–533 A.D. made an enormous effort to compile the main contributions of classical Roman jurists and recorded them in four books (the Institutiones, the Digest, the Codex Constitutionum and Novellae), which, since the edition of Dionysius Gottfried, are known as the Corpus Juris Civilis. The Institutiones is an essential work directed at students and based on
Gaius’s Institutiones. The Digest or Pandecta is a compilation of classical legal texts which includes over nine thousand excerpts from the works of different prestigious jurists. Passages taken from the works of Ulpian, which comprise a third of the Digest, together with excerpts from Paul, Papinian, and Julianus, fill more of the book than the writings of all of the rest of the jurists as a group. In all, contributions appear from thirty-nine specialists in Roman classical law. The Codex Constitutionum consists of a chronologically-ordered collection of
imperial laws and constitutions (the equivalent of the presentday concept of legislation), and Novellae, the last work in the Corpus, contains the last imperial constitutions subsequent to the Codex Constitutionum.
Now let us follow up this brief introduction by turning to the Roman classical jurists and their treatment of the institution of monetary irregular deposit. It is clear they understood it, considered it a special type of deposit possessing the essential deposit characteristics and differentiated it from other contracts of a radically different nature and essence, such as the mutuum contract or loan.