суббота, 30 июня 2012 г.

BANKING DURING THE REIGN OF CHARLES V AND THE DOCTRINE OF THE SCHOOL OF SALAMANCA

Banking during the reign of Charles V is a good example of the scenario we have been describing. First, the massive influx of precious metals from the Americas shifted the economic focus, at least temporarily, from the Northern Italian
trading cities to Spain; specifically, Seville and the other Spanish business centers. Second, due to his imperial policy, Charles V was in constant need of funds, and he turned to the banking system for a continual source of financing. In this way, he unscrupulously took advantage of the liquidity it provided him and powerfully reinforced the traditional complicity between authorities and bankers. A more disguised collaboration between the two was already the norm at that time.
Furthermore, Charles V was unable to keep the royal treasury from going bankrupt, which, as could be expected, had very negative effects on the Spanish economy and on the bankers who had financed his projects. All of these events motivated the most brilliant minds of the time, the scholars of the School of Salamanca, to reflect on the financial and banking activities they witnessed. These theorists left us with some very valuable analyses worthy of being studied in detail.

THE DEVELOPMENT OF BANKING IN SEVILLE
Ramon Carande deserves credit for uncovering in some detail the development of private banking in Seville during the reign of Charles V. According to Carande, his research was aided by the discovery of a list of bankers compiled prior to the confiscation of precious metals by Seville’s Casa de Contratación (Trading House) in 1545. An impoverished treasury prompted Charles V to disregard the most basic legal principles and seize funds where he could find them: i.e., deposited in the vaults of Seville’s bankers. Granted, these bankers also violated the basic legal principles governing the monetary irregular deposit and employed in their own private dealings a large share of the money deposited. However, the emperor’s policy of directly confiscating whatever funds remained in their vaults incited bankers to routinely loan to third parties most money on deposit. If there was ultimately no guarantee that public authorities would respect bank reserves (and bankers’ own experience taught them that, when short of money, the emperor had no qualms about forcibly appropriating those funds in the form of compulsory loans to the Crown), it seemed wiser to invest most deposited money in loans to private industry and commerce, thus evading expropriation and earning higher profits.
The practice of confiscating deposits is perhaps the most extreme example of public authorities’ traditional tendency to capitalize on banking profits by expropriating the assets of those who have a legal duty to better guard the deposits of others. It is therefore understandable that rulers, being the main beneficiaries of bankers’ dubious activities, ended up justifying them and granting bankers all kinds of privileges to allow them to continue operating with a fractional reserve, on the fringes of legality.
In his chief work, Carlos V y sus banqueros, Ramón Carande lists the most important bankers in the Seville of Charles V, namely the Espinosas, Domingo de Lizarrazas, and Pedro de Morga, along with the less prominent Cristóbal Francisquín, Diego Martínez, Juan Íñiguez, and Octavio de Negrón. All of them inexorably went bankrupt, for the most part due to a lack of liquidity with which to satisfy depositors’ withdrawals of demand deposits. This demonstrates they were operating with a fractional reserve, aided by a license or privilege obtained from the city of Seville and from Charles V himself. We do not have information on their exact reserve ratio, but we do know that on many occasions they made personal investments in the fleet used for trading with the Americas, in the collection of taxes, etc. Such risky ventures were always tremendously tempting, because when they went reasonably well they yielded enormous profits. Moreover, as mentioned above, the repeated confiscation of bank deposits of precious metals only further encouraged bankers to carry on their illegitimate activities. Consequently, the Espinosas’ bank failed in 1579 and the senior partners were imprisoned. The bank of Domingo de Lizarrazas failed on March 11, 1553, when he was unable to make a payment of more than six and a half million maravedis, while the bank of Pedro de Morga, who began his operations in 1553, failed in 1575, during the second bankruptcy of Philip II. The less prominent banks suffered the same fate. Thomas Gresham made an interesting comment on this issue. He had traveled to Seville with instructions to withdraw three hundred twenty thousand ducats in cash, for which he had obtained the necessary license from the emperor and Queen Mary. Gresham marveled that in the very city that received the treasures of the Indies money could be so extremely scarce. The same was true for the markets, and Gresham feared that all the city’s banks would suspend payments as soon as his withdrawal was completed. It is unfortunate that Ramón Carande uses such inadequate analytical tools and that his interpretation of these bank failures derives mainly from anecdotal information, such as the greed for metals, which constantly threatened banks’ solvency; bankers’ daring personal business ventures (their involvement in the chartering of vessels, overseas merchant shipping, insurance,
various types of speculation, etc.), which continually placed them in serious predicaments; and the royal treasury’s repeated confiscation of valuables and its want of liquidity. He never once mentions the following chain of events: Fractional-reserve banking led to an artificial credit expansion unsupported by
sufficient real savings; this, along with the inflation of precious metals from the Americas, generated an artificial boom; the boom, in turn, produced an economic crisis and inevitable recession; and this was the true cause of the bank failures.
Fortunately, Ramón Carande’s omission of theory has been at least partially compensated for by Carlo M. Cipolla’s interpretative study of the economic and bank crisis of the second half of the sixteenth century. Though this analysis refers strictly to Italian banks, it is also directly applicable to the Spanish
financial system, due to the intimate relationship existent at the time between the financial and trade routes of the two countries. Cipolla explains that in the second half of the sixteenth century, the money supply (what we refer to today as M1 or M2) included a large amount of “bank money,” or deposits created out of nowhere by bankers who did not maintain possession of 100 percent of the cash on demand deposit. This gave rise to a period of artificial economic growth, which began to reverse in the second half of the sixteenth century, when
depositors nervously started to experience economic difficulties and the most important Florentine banks began to fail.

According to Cipolla, this phase of expansion was set in motion in Italy by the directors of the Ricci Bank, who used a very large share of their deposits to buy government securities and grant loans. The other private banks were obliged to
adopt the same policy of credit expansion if their managers wanted to be competitive and conserve their profits and market share. This process gave rise to a credit boom which led to a phase of great artificial expansion that soon began to reverse. In 1574, a proclamation accused bankers of refusing to return deposits in cash and denounced the fact that they only “paid with ink.” It became increasingly more difficult for them to return deposits in ready cash, and Venetian cities began to experience a significant money scarcity. Craftsmen could not withdraw their deposits nor pay their debts and a severe credit squeeze (i.e., deflation) followed, along with a serious economic crisis analyzed in detail by Cipolla in his interesting paper. From a theoretical standpoint, Cipolla’s analysis is stronger than Ramón Carande’s, although it is not completely adequate either, as it places more emphasis on the crisis and credit squeeze than on the prior stage of artificial credit expansion, wherein lies the true root of the evil. The credit expansion phase, in turn, is rooted in the failure of bankers to comply with the obligation to safeguard and maintain intact 100 percent of the tantundem.
Of international relevance were the long-standing relations between Charles V and members of the prominent Fugger banking family (known in Spain as the Fúcares). The Fuggers of Augsburg started out as wool and silver merchants and also traded spices between their city and Venice. Later they concentrated on banking, and in their heyday they operated eighteen branches in different parts of Europe. They granted loans to help finance the election of Charles V as emperor and later funded his exploits on many occasions, receiving as collateral both the silver shipments from the Americas and the authorization to collect taxes. Their business came to a standstill and barely escaped bankruptcy in 1557 when Philip II de facto suspended payments, and in fact they continued to lease
the lands belonging to military orders until 1634.

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