Medici Bank

"An interesting section of the chapter recounts the history of the famed Medici Bank of medieval Florence, drawing on the archival research of Raymond de Roover's book The rise and decline of the Medici Bank, 1397-1494 (Cambridge: Harvard University Press, 1963). The Medici Bank lasted ninety-seven years. A run on the bank is not included in the list of reasons De Roover (p. 3) offers to explain its eventual failure.

At first, Huerta de Soto (p. 72) emphasizes, the Medici Bank accepted only fixed-term accounts, labeled depositi a discrezione. (To evade church prohibition of usury, interest on the account balance was treated as a gift at the bank's discretion, hence the label.) Later, in Huerta de Soto's words (p. 73), "the bank began to accept demand deposits and to use a portion of them inappropriately as loans". How do we know that the bank's use of the funds (rather than locking them all in the vault) was inappropriate? No evidence is provided that the bank misrepresented itself as a warehouse for the funds placed into demand accounts. Everyone knew it was lending out the funds placed into fixed-term interest-bearing accounts. Was it also paying interest on demand accounts, clearly signaling that it was not warehousing the funds? Apparently yes. According to de Roover (pp. 103-4), the same account could begin with a fixed term and later become redeemable on demand, while continuing to pay interest. One extant account document "certifies that Cosimo and Lorenzo de' Medici & Co. of Venice have received from Lady Jacopa, the wife of Malatesta de' Baglioni of Perugia, the sum of 2,000 fiorini larghi to be placed on deposit for one year. After this first year, the contract is automatically renewable from year to year, but with the understanding that principal and accrued interest, or rather discrezione, are repayable at any time at the request of the depositor" [emphasis added]. It is clear from the payment of interest that Lady Jacopa neither wanted nor expected the Medicis to act as a warehouse.

To Huerta de Soto (p. 74 n. 62), the holding of fractional reserves means that the Medicis were guilty of "violations of the traditional legal principle requiring them to maintain possession of 100 percent of demand deposits," but Florentine banking of that era seems not to have recognized any such principle. De Roover (p. 17-18) says of medieval Florentine bankers:

Apparently, they always stood ready to change moneys and to make payments by transfer and these were the only two functions which the Arte del Cambio [the bankers' guild] attempted to regulate. ...In the banking field, gild regulations did not go beyond the setting of professional standards and the protection of depositors against fraudulent practices. Insolvent or bankrupt money-changers were, of course, excluded from membership until creditors had been fully satisfied.

This passage indicates that payment services were central to commercial banking by this time, while warehousing services were not. Those who placed funds in a bank were normally considered creditors, not holders of warehouse claims. There is no indication that fractional reserves were proscribed."

Review of Jesús Huerta de Soto's Money, Bank Credit, and Economic Cycles

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Medici Archive Project
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