Huerta de Soto J. (1996) The Bankers of Seville

 Huerta de Soto, Jesus (1996) “New Light on the Prehistory of the Theory of Banking and the School of Salamanca”, The Review of Austrian Economics, 9/2, 59-81.

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This article is available on line (pdf) 


During the 16th century, all the bankers of Seville inexorably went bankrupt. They were unable to meet the withdrawal demands from their depositors due to insufficient liquidity. Indeed they worked with fractional cash ratio, which allowed them to invest heavily in the shipping and tax collection business they owned and when confronted with an important demand of cash, they simply suspended payment (p.61). “Artificial credit creation, without an adequate base of real saving” was always threatening to push the city into recession. The positive effects of the practice reversed in the second half of the century (p.62).

The scholars attack the bank

In his Instruccion de Mercaderes (1556), Saravia de la Calle accuses the depositors to participate to the bankers’sinful endeavours. Indeed, considering that usury is forbidden, whoever trust his money to a known usurer is committing an obvious sin (p.64). Indeed, was the banker not loaning the money, he would not pay interests upon the sums entrusted to him. On the contrary, he would ask to be paid for looking after his clients’ cash (p.65). 

“If [the moneylenders] did not exist, each person would trade with his money as he could and no more and thus things would cost their just price” (p.66).

The same arguments were used by Tomas de Mercado in his Suma de Tratos y Contratos (p.68) however with less emphasis on the sinful character of the action. De Mercado underlines the fact “the transfer of property which occurs in the monetary bank deposit does not imply a parallel transfer of availability and, therefore, […] a full transfer of property does not occur.”

“The bankers must understand that the money is not theirs but belongs to someone else and that is not all, when they have it serve them, it ceases to serve its owner.”

So fractional cash ratio and speculative moves with demand deposit money were not only sinful, they were also illegal (p.69).

Scholastic v. scholastic

Not all the members of the famed School of Salamanca however supported these theses. The Jesuits, in particular Domingo de Soto, Luis de Molina and Juan de Lugo, opted for a much more lenient approach than the Dominican writers. In their view a deposit was de facto a loan which included full transfer of property rights to the banker. The latter could thus invest this money (for all practical purposes, his money) as he intended as long as he remained prudent and retain enough capital to meet the usual withdrawal demands. In this fashion the Jesuit fathers support a typical process of credit creation (p.70).

This position however somewhat contradict the same authors’ view that a loan is only a loan if a fixed date for its repayment has been clearly stated (p.71).

Quantity theory

In 1556, Martin de Azpilcueta stated that:

“In France, there is less money than in Spain, bread, wine, clothing, labour and work cost much less. […] The cause of which is that money is worth ;ore where and when it is lacking than where and when it is in abundance” (p.74).

This insight was completed by Luis de Molina’s realization that checks and bills of exchange fulfilled the same function as cash (p.75). And consequently that the total volume of the transactions carried out on the market was significantly superior to the available amount of cash and that the banks’ credit creation affected significantly the quantity of exchange possible (p.76).In other words, the same money is used twice, once by the depositor and once by the bank itself, resulting in a greatly enhanced amount of means of payment in circulation (p.78).

Disclaimer: this summary is written by the contributors of the blog and not by the author of the article. Any mistake is Manuel’s fault (and he shall be punished).

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