Money, Bank Credit, and Economic Cycles (LvMI) by Jesús Huerta de Soto

Author:Jesús Huerta de Soto
Language: eng
Format: mobi
ISBN: 9781610162548
Publisher: Ludwig von Mises Institute
Published: 1998-11-06T16:00:00+00:00

BUSINESS CYCLES PRIOR TO THE INDUSTRIAL REVOLUTION

(a)It would be impossible to cover here (even in condensed form) all cycles of boom and recession which affected the world’s economies prior to the Industrial Revolution. Nevertheless we are fortunate enough to have available to us a growing number of works on economic history which greatly facilitate the application of the theory of the business cycle to specific economic events from the past. We could begin by mentioning Carlo M. Cipolla’s works on the crises which gripped the Florentine economy in the mid-fourteenth century and in the sixteenth century, crises we covered in chapter 2.82 Indeed we saw that Cipolla, following R.C. Mueller’s studies,83 documented the substantial credit expansion Florentine banks brought about starting at the beginning of the fourteenth century.84 The result was a significant economic boom that made Florence the center of financial and trade activity in the Mediterranean. Nonetheless a series of events, such as the bankruptcy in England, the withdrawal of funds in Naples, and the crash of Florentine treasury bills triggered the beginning of the inevitable crisis, which manifested itself in widespread bank failure and a strong tightening of credit in the market (or as it was then known, mancamento della credenza). Cipolla points out that the crisis resulted in the destruction of a great stock of wealth, and real estate prices, which had skyrocketed, plummeted to half their former value, and even such a reduction in price was insufficient to attract enough buyers. According to Cipolla, it took thirty years (from 1349 to 1379) for a recovery to begin. In his opinion a major role in the recovery was played by the disastrous plague, which

broke the vicious spiral of deflation. Since the number of capita was suddenly and dramatically reduced, the average per capita amount of currency available rose. In addition, during the three years that followed the plague, the output of the mint remained high. Consequently, cash balances were unusually large, and they were not hoarded: the prevailing mood among the survivors was that of spending. Thus prices and wages increased.85

In chapter 2 we critically analyzed Cipolla’s use of the monetarist theory which underlies his interpretation of Florentine monetary processes.

(b)The second economic crisis Cipolla has studied in depth can also be fully accounted for in terms of the Austrian theory of the business cycle. It involves credit expansion which took place during the second half of the sixteenth century in Florence. Specifically Cipolla explains,

the managers of the Ricci bank used the public funds as a monetary base for a policy of credit expansion. The preeminence of the Ricci bank in the Florentine market must have lured the other banks into emulating its policy of credit expansion.86

According to Cipolla, during the 1560s the Florentine economy was quite active and was boosted by credit euphoria. However at the beginning of the 1570s the situation culminated in a severe liquidity squeeze which affected the entire banking system. Bankers, as the chroniclers colorfully put it, “only paid in ink.” The

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