What my credit can do in (medieval) Venice

Mueller, Reinhold C. (1987) I banchi locali a Venezia nel Tardo Medioevo. Studi Storici, 28/1: 145-55.


There is a lot to be admired in Austrian economists, their resilience, their attachment to simple elegant ideas and their sound understanding of the long-term factors that give the economy its cyclical nature. But one must admit that their Ludite-like hatred for finance is to the very least puzzling. They claim to trust nothing but gold and they would like to see the activity of banks restricted to little more than a locker service. Their trust in free market and in the adaptive nature of human ingenuity ends at the door of their local branch of HSBC.

Our Austrian friends often find support in the writings of antic theoreticians, in particular the venerable masters of the School of Salamanca. Sometimes they go so far as to try to back their views with actual empirical research, but, to be honest, it’s rarely convincing. On the contrary, Mueller’s (1987) has the double advantage to offer an unbiased view of history and to be more theoretically consistent than most of those who claim aloud their love for the free market all day long.

In the late 13th century, in Venice, a dozen of specialist bankers emerged. They settled close to the Rialto. They stood out from the usual merchant-bankers common at the time, who mixed international trade and financial services and who mostly limited themselves to the manipulation of bills of exchange. The new type of intermediaries, known to the literature as “local bankers” became rapidly and immensely successful. Their combined balance sheets towered at about a million ducats by the end of the 1400s, which, in the words of an anonymous contemporary observer is “very considerable” (p.152).

These local bankers offered a valued service to the Venetian business community and the foreign merchants trading in the city. They took deposit of the all the different currencies brought by their clients and converted them into a single bank money allowing giro transactions and accepted by all the bankers of the place which tremendously facilitated transactions. Gone were the unscrupulous client paying in counterfeited coins, the thief stealing your purse and the tedious task of manipulating vast quantities of small coins (p.146).

With these deposits, local bankers lent capital for commercial ventures. This of course created a certain level of instability and bankers regularly went bankrupted, however the industry seem to have adapted to this contingency and the firms started consolidated to be more liquid. By the early 1400s the number of bankers near the Rialto had dropped from a dozen to less than five (p.151). In Mueller’s eyes their impact on the economy of the city was tremendous as the monetary creation engendered by their lending practices might have had a stimulating impact on the city’s commercial activity (p.148). A clear evidence of the profitability of this practice can be found in the rapid emergence of an agio rewarding in practice the depositors, while avoiding the laws banning usury (p.150).

The State rapidly started to regulate the banking sector. To be allowed to open shop the banker-to-be was to present guarantors to the magistrates in charge of commerce. In the 1500s, the bankers even became legally dependent from the Senate of the Republic itself. To improve the safety of the banking system, they were barred from backing the most risky ventures such as trade with the Levant. But the constantly cash-strapped government began to take interest in the bankers’ ability to create money by a simple signature on their ledgers.

As a result, however, the capacity of the Republic to repay its debt became the main driver of the bankers’ reputation and in the trust put into the system (p.153). The systemic risk implied by this situation coupled with the growing importance of the bankers for the city’s finance are interpreted by Mueller as having weakened the position of private banker and to have ultimately led to the creation of the Banco del Rialto, Venice’s public bank in 1587 (p.155).

This great piece of research shatters completely the usual Austrian prevention agains the use of fractional reserve banking. True, it leads to a certain level of instability of the system as a whole but this should not hide the fact that the practice appears to have been widespread from the 13th century to the ban of private exchange in the 1580s, a flourishing period for Venice. Other cities in Europe such as Brugge and Antwerp made do with money creation solidly into private hands, and it appears not to have been a great impediment to their development.

One Response to What my credit can do in (medieval) Venice

  1. Interesting stuff. I’m also blogging about the economy at geoffhudson712.wordpress.com

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