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.
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.
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