THE SCHOOL OF SALAMANCA AND THE BANKING BUSINESS 2

In his book, Suma de tratos y contratos (Compilation of deals and contracts) (Seville 1571), Tomás de Mercado performs an analysis of the banking business very much in the same line as the studies by the preceding authors. He begins by correctly stating that depositors should pay bankers for the work of safeguarding their monetary deposits, concluding that it is a common, general rule among all bankers to be able to take wages from those who deposit money in their bank, a certain amount each year or for each thousand, because
bankers serve depositors and safeguard their assets.
Nevertheless, Tomás de Mercado ironically points out that bankers in Seville are so “generous” they charge nothing for guarding deposits: “those of this city, it is true, are so regal and noble they ask for and take no wage.” Tomás de Mercado
observes that these bankers have no need to charge anything, since the large amount of currency they obtain from deposits earns them substantial profits in personal business deals. We must emphasize that, in our opinion, Tomás de Mercado simply verifies a fact here and does not imply that he considers these actions in any way legitimate, as various modern authors (among others, Restituto Sierra Bravo and Francisco G. Camacho) appear to suggest. Quite the opposite is true.

From the standpoint of the purest Roman doctrine and the essential legal nature of the monetary irregular-deposit contract, Tomás de Mercado is the scholastic writer who most clearly demonstrates that the transfer of property in the irregular deposit does not imply a concomitant transfer of availability of the tantundem and therefore, for all practical purposes, there is no full transfer of property. He expresses himself quite well: “they [bankers] must understand that the money is not theirs, but belongs to others; and it is not fair that by using it, they cease to serve its owner.”
Tomás de Mercado adds that bankers should obey two fundamental principles. First: they should not strip the bank so bare they cannot then cover the drafts
they receive, because if they become unable to pay them because they have spent and invested the money in shady business and other deals, they certainly sin. . . . Second: they should not become involved in risky business deals, for they sin even if the deals turn out successfully, because the bankers chance not being able to fulfill their responsibilities and doing serious harm to those who have trusted them.
Though one could take these recommendations as an indication that Tomás de Mercado resigns to accept a certain fractional reserve, it is important to keep in mind that he is very emphatic in expressing his legal opinion that deposited
money does not ultimately belong to bankers but to depositors, and in stating, furthermore, that none of the bankers complies with his two recommendations:
however, since when business goes well, in affluent circumstances, it is very difficult to bridle greed, none of them takes heed of these warnings nor meets these conditions.
For this reason, he considers the regulations enacted by the Emperor Charles V in this respect to be very beneficial. They prohibited bankers from carrying out personal business deals and were aimed at eliminating the temptation to finance such dealings indefinitely with money obtained from depositors.
Also, at the end of chapter 4 of Suma de tratos y contratos, Tomás de Mercado states that the bankers of Seville hold deposits of money and precious metals belonging to merchants who traded with the New World, and that with such considerable deposits they “make great investments,” obtaining hefty profits. Here he does not openly condemn these practices, but we must remember that the passage in question is, again, more a description of a state of affairs than a judgment on its legitimacy. However, he does consider the issue of legitimacy. Tomás de Mercado concludes as well that bankers are also involved in exchanging and charging; bankers in this republic engage in an extremely wide range of activities, wider than the ocean, but sometimes they spread themselves too thin and all is lost.
The scholastics most misguided in their doctrinal treatment of the monetary irregular-deposit contract are Domingo de Soto and (especially) Luis de Molina and Juan de Lugo.
Indeed, these theorists allowed themselves to be influenced by the medieval tradition of the glossators, and especially by the doctrinal confusion resulting from the depositum confessatum. De Soto and especially Molina view the irregular deposit as a loan in which both the ownership and full availability of the tantundem are transferred to the banker. Therefore, they believe the practice
of loaning deposited funds to third parties is legitimate, as long as bankers act in a “prudent” manner. Domingo de Soto could be considered the first to maintain this thesis, though he did so very indirectly. In fact, in book six, topic eleven of his work, La justicia y el derecho (On justice and law) (1556), we read that bankers have the custom, it is said, of being liable for a greater amount of money than that deposited if a merchant makes his deposit in cash. I gave the moneychanger ten thousand; so he will be liable to me for twelve, perhaps fifteen; because having cash is very profitable for the moneychanger. Neither is any evil seen in it.
Another typical example of credit creation which Domingo de Soto appears to accept is a loan in the form of the discount of bills, financed using clients’ deposits.
Nevertheless, the Jesuit Luis de Molina is the scholar who has most clearly maintained an erroneous doctrine on the bank contract of monetary irregular deposit. Indeed, in Tratado sobre los cambios (Treatise on exchanges) (1597), he
upholds the medieval doctrine that the irregular deposit is a loan or mutuum contract in favor of the banker, a contract in which not only ownership is transferred, but full availability of the tantundem as well, which means the banker can legitimately use the money in his own interest, in the form of loans or in any other manner. Let us see how he presents his argument:
Because these bankers, like all the others, are true owners of the money deposited in their banks, and they differ greatly in this way from other depositaries . . . so they receive the money as a precarious loan and hence, at their own risk. Further on he indicates even more clearly that such a deposit is really a loan, as has been said, and ownership of the money deposited is transferred to the banker, so if it is lost it is lost to the banker.
This position conflicts with the doctrine Luis de Molina himself upholds in Tratado sobre los préstamos y la usura (Treatise on loans and usury), where he indicates that a term is an essential element of all loan contracts, and that if the duration of a loan has not been expressly stipulated and a date for its return
set, “it will be necessary to accept the decision of the judge as to the loan’s duration.” Moreover, Luis de Molina ignores all of the arguments presented in chapter 1 to demonstrate that the irregular deposit contract has nothing in common, in terms of legal nature and essence, with the loan or mutuum contract. Therefore, his doctrinal attempt to identify the two contracts with each other is a clear step backward, not only in relation to the much more coherent views of Saravia de la Calle and Martin de Azpilcueta, but also with respect to the true legal nature of the contract as it had already been developed by Roman juridical science. Therefore, it is strange that a mind as bright and penetrating as Luis de Molina did not realize the extreme danger of accepting the violation of the general legal principles governing the irregular deposit, and that he claimed,
it never occurs that all the depositors need their money in such a way that they do not leave many thousands of ducats deposited, with which the bankers can do business and either earn a profit or suffer a loss.
Molina does not recognize that in this way not only is the objective or essential purpose of the contract (custody and safekeeping) violated, but also that an incentive is provided for all sorts of illicit dealings and abuses which inexorably
generate an economic recession and bank failures. When the traditional legal principle requiring the continual safekeeping of the tantundem in favor of the depositor is not respected, there is no clear guide to avoiding bank failures. Furthermore, it is obvious that such vague, superficial suggestions as “try to act
prudently” and “do not become involved in risky business deals” are not sufficient help in preventing the very harmful economic and social effects of fractional-reserve banking. At any rate, Luis de Molina does at least bother to state, It is important to warn that [bankers] commit mortal sin if they use in their own business dealings so much of the money they hold on deposit that they are later unable, at the right time, to hand over the quantities the depositors request
or order to be paid against their deposited funds. . . . In addition, they commit mortal sin if they become involved in business dealings entailing a risk of not being able to return deposits. For example, if they send so much merchandise
overseas that, should the ship sink or be captured by pirates, they would not be able to repay deposits even after selling all of their assets. And they are not guilty of mortal sin only when the deal turns out poorly, but also when it turns out well. This is due to the chance they take of hurting depositors and the guaran- tors they themselves supply for the deposits.

We find this warning of Luis de Molina admirable, but at the same time we are astonished at his failure to recognize the profound contradiction that ultimately exists between his warning and his explicit acceptance of “prudent” fractional-
reserve banking. The fact is, regardless of how prudent bankers are, the only surefire way to avoid risks and ensure that deposits are permanently available to depositors is to maintain a 100-percent reserve ratio at all times.