===== PAGE 1 =====

New Light on the Prehistory of the
Theory of Banking and the School
of Salamanca

Jesus Huerta de Soto

s is known, Murray N. Rothbard was one of the theorists who

defended with the most creativity and coherence the need for

free banking subject to general legal principles, in other words,
banking with a cash ratio of 100 percent of demand deposits. Likewise,
he was one of the first theorists to stress the great influence which the
theoretical contributions of the Spanish scholastics of the University of
Salamanca in the sixteenth and seventeenth centuries were to have as
the direct predecessors of the Austrian School of Economics.’

We feel that perhaps one of the greatest tributes which can be paid
to Murray N. Rothbard is to show how the theorists of the School of
Salamanca, whose intellectual activity took place from the reign of
Carlos Vin the sixteenth century onwards, developed an incipient the-
ory on the legitimate practice of banking which coincides, to a great
extent, with the contributions on this subject by the Austrian School
in general and, particularly, by Murray N. Rothbard.

The analysis of banking during the reign of Carlos V is paradig-
matic for several reasons. Firstly, because the massive inflow of pre-
cious metals from America caused the economic center of gravity to
move, at least temporarily, from the mercantile cities in the north
of Italy towards Spain, specifically Seville, and the other Spanish

*Jesis Huerta de Soto is professor titular de economia politica, Universidad
Complutense de Madrid, Spain.

See Murray N. Rothbard, “New Light on the Prehistory of the Austrian School,”
Edwin G. Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City:
Sheed and Ward, 1976), pp. 52-74. I have a letter from F. A. Hayek dated January 7,
1979, in which he states that, apart from Raymond de Roover, the researchers to whom
we owe the establishment of the link between the School of Salamanca and the Austrian
School are, chronologically, H.M. Robertson, Aspects of the Rise of Economic Individu-
alism (Cambridge: Cambridge at the University Press, 1933); Marjorie Grice-Hutchin-
son, The School of Salamanca (Oxford: Clarendon Press, 1952); and, especially, Murray
N. Rothbard in his above mentioned article.

The Review of Austrian Economies Vol. 9, No. 2 (1996): 59-81
ISSN 0889-3047

59


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60 The Review of Austrian Economics Vol. 9, No. 2

markets. Secondly, because Carlos V’s constant need for cash, which
was the result of his extravagant imperial policy, led him to continu-
ally finance his exploits through the banking system, taking advan-
tage of the liquidity which it provided him without any scruples. The
traditional complicity between bankers and governors which, although
there was some degree of dissimulation, had already become a general
rule was thus taken to its utmost limit by Carlos V. Moreover, he could
not avoid the bankruptcy of the royal treasury which, logically, had per-
nicious consequences for the Spanish economy in general and, in par-
ticular, for the bankers who had financed him. All these events led the
sharpest minds of the era, the theorists of the School of Salamanca, to
begin to reflect on financial and banking activities and, as a result, we
have a series of enormously valuable theoretical analyses which
should be studied in detail. We analyze each of these aspects below.

The Development of the Banks in Seville

Thanks to the work of Ramén Carande,’ we know about the develop-
ment of private banking in Seville during the reign of Carlos Vin some
detail. Carande explains that he was able to carry out his research as
a result of the list of bankers drawn up in relation to the confiscation
of precious metals by the Casa de Contratacion (Trade House) of
Seville in 1545. The unsatisfactory situation of the treasury meant
that Carlos V, violating the most elementary legal principles, resorted
to appropriating money from where it was most readily available: de-
posits in the safes of the bankers of Seville. It is true that these bank-
ers, as we will see later, also violated legal principles in relation to the
demand-deposit contract (i.e., deposit of fungible money) and used a
large part of the deposits received for their own business. However, it
is no less true that the inauspicious imperial policy, by transgressing
the most elementary principles of property rights and directly confis-
cating the stocks of money kept in the vaults, merely provided an even
bigger incentive for the bankers to invest the greater part of the de-
posits received in loans, which became a habitual practice: if, in the
final analysis, there was no guarantee that the public authorities
would respect the part of the cash reserve which was kept in the bank
(and experience showed that, when times were difficult, the Emperor
did not hesitate to confiscate this reserve and substitute it by compul-
sory loans to the Crown), it was preferable to devote the greater part
of the deposits to loans to private industry and commerce, thus avoid-
ing expropriation and obtaining a greater profitability.

*Ramén Carande, Carlos V y sus Banqueros, 3 vols. (Barcelona and Madrid:
Editorial Critica, 1987).


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 61

In any case, this policy of confiscation is perhaps the most extreme
manifestation of the public authorities’ traditional policy of taking
advantage of illegitimate banking profits by expropriating the assets
of those who, by legal obligation, should best guard and preserve the
deposits of third parties. It is understandable, therefore, that the gov-
ernors, as the main beneficiaries of the bankers illegitimate activity,
ended up justifying it and granting it all kinds of privileges so that it
could continue to act, with a fractional-cash ratio, outside the frame-
work of general legal principles.

In his magnum opus, Carlos Vy sus Banqueros (“Carlos V and his
Bankers”), Ramén Carande lists the most important bankers in the
Seville of Carlos V, specifically the Espinosas, Domingo de Lizarrazas
and Pedro de Morga, together with other, less important, bankers, such
as Cristobal Francisquin, Diego Martinez, Juan Ifiguez and Octavio de
Negron. All of them inexorably became bankrupt, basically due to having
insufficient liquidity to meet the withdrawal of demand deposits which
had been placed with them. This shows that they worked with a frac-
tional-cash ratio, thanks to the license or privilege which they had ob-
tained from the Municipality of Seville and from Carlos V himself. We
have no information on the percentage of reserves they held, but we do
know that, on many occasions, they invested in their own shipping busi-
nesses (fleets which traded with America) and the collection of taxes
which were a tremendous temptation because, if the conditions were
favorable, the profits were very significant. Moreover, the successive
confiscations of precious metals deposited with the bankers merely pro-
vided a greater incentive for their illegitimate behavior. Thus, the Espi-
nosas went bankrupt in 1579 and the main partners were imprisoned.
The bankruptcy of Domingo de Lizarrazas occurred on March 11, 1553,
when he could not meet a payment of more than six and a half million
maravedis. Pedro de Morga, who began operations in 1553, went bankrupt
in 1575, during the second bankruptcy of King Felipe II. The rest of the
less important bankers met the same fate and, in this respect, it is inter-
esting to note the presence and comment of Thomas Gresham, who travelled
to Seville with instructions to withdraw three hundred and twenty thousand
ducats in cash, for which he had obtained the necessary license from the
Emperor and from Queen Maria. Gresham was astounded to find that, in
the city which received the treasures of the Indies, money was very
scarce, as it was in the trade markets, and he feared that, upon withdrawal
of the funds to which the orders he was bearing referred, all the banks
of the city would suspend payments.’ It is regrettable that Ramén

Finally, with a great deal of effort, he managed to obtain two hundred thousand ducats
but, as he wrote, “I am afraid of causing the bankruptcy of all the banks of Seville.”


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62 The Review of Austrian Economics Vol. 9, No. 2

Carande’s theoretical analysis leaves so much to be desired and that
his study interpreting the bankruptcy of these banks is based solely on
anecdotal “explanations,” such as “greed” for metals, which constantly -
placed the solvency of the bankers in a situation of crisis; the fact that the
bankers carried out risky personal business deals, which continually im-
plied heavy obligations (the chartering of vessels, overseas maritime
trade, insurance transactions, various speculative types of business,
etc.); and the royal treasury’s repeated confiscations and need for liquid-
ity. Nowhere is the true cause of the phenomenon mentioned: the inevi-
table recession and economic crisis resulting from the artificial boom
caused by the inflation of precious metals from America and the arti-
ficial credit expansion without an adequate base of real saving, de-
rived from the practice of banking with a fractional-cash ratio.

Fortunately, Carlo M. Cipolla has covered this gap in theory of
Ramon Carande, at least partially, and has made a study interpreting
the banking and economic crisis of the second half of the sixteenth cen-
tury which, although it refers strictly to the Italian banks, is also di-
rectly applicable to the Spanish financial system, as the trading and
financial circuits and flows between the two nations were, at that time,
intimately related.’ Cipolla explains that the monetary supply (what
is today called M1 or M2) in the second half of the sixteenth century
included a large amount of “bank money” or deposits created out of
nowhere by the bankers who did not keep a 100-percent-reserve ratio
of the cash which had been deposited with them at demand by their
clients. This led to a tremendous artificial thriving of the economy,
which inevitably reversed in the second half of the sixteenth century
when depositors began to experience economic difficulties and the
wave of bankruptcies felt by the most important bankers in Florence
began.

This expansionary phase was started in Italy, according to Cipolla,
by the managers of the Ricci Bank, who used a significant part of the
bank’s newly created deposits to purchase public funds and grant credits.
This policy of credit expansion dragged the other private banks along
with it, if they wanted to be competitive and maintain their profits and
market share. A state of credit euphoria was thus created, which gave
rise to a great artificial expansion that soon began to revert. Thus, we

See Ramon Carande, Carlos Vy sus Banqueros, vol.1, pp. 299-23, and esp. pp. 315-186,
which deals with Gresham's visit to Seville.

“See Carlo M. Cipolla’s important article “La moneda en Florencia en el Siglo XVI,”
published in E! Gobierno y la Moneda: Ensayos de Historia Monetaria (Barcelona:
Editorial Critica, 1994), pp. 11-142; esp. pp. 96 onwards. This book is the Spanish
edition of the work originally published in Italian with the title Il Governo della Moneta:
La Moneta a Firenze nel Cinquecento (Bologna: Societ4 editrice I1 Mulino, 1990).


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 63

can read an edict of 1574 in which accusations are made against bank-
ers who refuse to return deposits in cash and which proclaims the fact
that they only “paid with ink.” They had increasing difficulties in return-
ing deposits in ready money and a significant money shortage began to
be perceived in the Venetian cities. The artisans could not withdraw their
money or pay their debts and there was a heavy credit contraction (in
other words, a deflation) and a deep economic crisis, which Cipolla ana-
lyzes in detail in his brilliant book. Cipolla’s analysis is, therefore, much
more solid from a theoretical point of view than that of Ramén Carande,
although it cannot be considered perfect, as it places the emphasis more
on the crisis and the period of credit contraction than on the preceding
phase of artificial credit expansion, which was the true origin of the evils
and of which, in turn, the most intimate cause of the bankers’ violation
of the obligation to guard and conserve intact 100 percent of the tan-
tundem or equivalent of the original deposits.’

The School of Salamanca and the Banking Business:
The Initial Contribution of Doctor Saravia de la Calle

The financial and banking phenomena that we are discussing made an
impression on the outstanding minds of the members of the School of
Salamanca who, according to the most reliable research, are the fore-
runners of the subjectivist conception developed by the Austrian
School of Economics.’

Cipolla tells us how the Ricci Bank, from the seventies onwards, was not able to
meet the demand for payments in cash and, de facto, suspended payments, as it paid
simply “with ink” or “with bank policies.” The authorities of Florence, looking only at
the symptoms and trying, with typical good intentions, to resolve this worrying situ-
ation merely by decrees, imposed on bankers the obligation to pay their creditors in
cash without any delay, but did not attack the fundamental causes of the phenomenon
(the undue appropriation of the deposits as loans and failure to hold a 100-percent-cash
ratio). This meant that the successive decrees issued met with inevitable failure and
the crisis became gradually more serious until it broke out with its full virulence in the
mid-1570s. Ibid., pp. 102-3.

bAmong others, the following have recently studied the contribution of the Spanish
scholastics to economic theory: Lucas Beltran in “Sobre los origenes hispanos de la
economia de mercado,” Cuadernos del Pensamiento Liberal 10, no.1 (1989): 5-38;
Marjorie Grice-Hutchinson, Economic Thought in Spain: Selected Essays of Marjorie
Grice-Hutchinson, Laurence S. Moss and Christopher K. Ryan, eds. (Aldershot, Eng-
land: Edward Elgar, 1993); Jesus Huerta de Soto, “Génesis, esencia y evolucién de la
Escuela Austriaca de Economia,” Estudios de Economia Politica (Madrid: Union Editorial,
1994), pp. 17-55; and esp. and most recently Murray N. Rothbard, Economic Thought
before Adam Smith: An Austrian Perspective on the History of Economic Thought, vol. 1
(Aldershot, England: Edward Elgar, 1995), pp. 101-27. The intellectual influence of the
Spanish theorists of the School of Salamanca on the Austrian School is not, however, a
pure coincidence or a mere whim of history. It originates from and exists because of the
intimate historical, political and cultural relations which, as from the reigns of Carlos V and
his brother Fernando 1, arose between Spain and Austria and which were to continue for
several centuries. In addition, Italy also played an important role in these relations, acting
as an authentic cultural, economic and financial bridge over which the relations between


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64 The Review of Austrian Economics Vol. 9, No. 2

Chronologically, the first work we should mention, which is also, per-
haps, the most relevant to our purpose, is Instruccién de Mercaderes
(“Instruction of Merchants”) by Doctor Saravia de la Calle, which was
published in Medina del Campo in 1544.” Saravia de la Calle is ex-
traordinarily hard on the bankers, whom he describes as “hungry glut-
tons, who swallow everything, destroy everything, confuse everything,
steal and dirty everything, like the harpies of Pineo.” He tells us how
the bankers “come out into the square and road with their table and
chair and cashbox and book, like the whores to the brothel with their
chair” and, having obtained the corresponding license and guarantee
ordered by the laws of the kingdom, they devote themselves to ob-
taining deposits from the clients, to whom they offer bookkeeping
and cashier services, paying into their account and even paying inter-
est on such deposits.

With sound legal criteria, Saravia de la Calle says that receiving
interest is incompatible with the nature of a demand deposit and that,
in any case, a fee should be paid to the banker for keeping or guarding
the money under his custody. He even reprehends harshly the clients
of the banks who agree to enter into such deals with the bankers. He
states: “And if you say, merchant, that you do not lend it, but that you
place it (or deposit it), that is a greater mockery; who ever saw the deposi-
tary pay? He is usually paid for the safekeeping and the work of the de-
posit; much more than that, if you now place your money with the mon-
eylender as a loan or as a deposit, in the same way as you take your part
of the profit that the moneylender takes, you also take part of the blame,
and even the greatest part.” In Chapter 12 of his book, Saravia de la Calle
also correctly distinguishes between the two radically different transac-
tions which the banks carry out. On the one hand, the demand deposits,
which the clients give, without any interest, to the bankers “to have them
safer and to have them more at hand in order to deliver them to whom
they are owed, and to free themselves from the burden and the work of
reckoning and safekeeping, and also because, as thanks for this good
deed which they do to the moneylenders in giving them their money, if
it occurs that they have no money in the hands of the moneylender, the

the two furthest points of the Empire (Spain and Vienna) flowed. In this respect, Jean
Berenguer’s interesting book E! Imperio de los Habsburgos (Barcelona: Editorial Critica,
1993), should be consulted, particularly pp. 133-35. This book is the Spanish edition of
the French original which was entitled Histoire de Lempire des Habsbourg 1273-1918
(Paris: Librairie Arthéme, Fayard, 1990).

"Luis Saravia de la Calle, Instruccién de Mercaderes (Medina del Campo: Pedro de
Castro, 1544); republished in Coleccion de Joyas Bibliogrdficas (Madrid, 1949).

81bid., p. 180.

Ibid., p. 181.


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 65

moneylender accepts some overdrafts from them also without inter-
est.”’’ On the other hand, very different from these contracts are the
term “deposits,” which are true loans and are characterized because
they are given over a time period in exchange for interest. Saravia de
la Calle, following the traditional canon law doctrine, deeply con-
demns this practice. Moreover, he clearly indicates that, in the case of
the first type of demand-deposit contracts, the clients should pay the
banker “because if they place monies in deposit, they must give for their
safekeeping, not receive the profits given to them when they deposit mo-
nies or goods which must be safely kept.”"! Saravia de la Calle therefore
criticizes those clients who selfishly try to take advantage of the illegiti-
mate activity of the bankers, entrusting them with their money in de-
mand deposits and trying to obtain interest on it. He adds the following
illustrative words: “he is not free from sin, at least venial sin, because he
entrusted the deposit of his money to whom he knows will not keep his
deposit, but will spend his money, like he who entrusts the maiden to the
lecher or the delicacy to the glutton.”* Neither may the depositor clear
his conscience by thinking that the banker will lend or use the money of
others, but not his own as if “it is believed of him that he will probably
keep that money of the deposit and will not lend it; and this probability
cannot be thought of any of these moneylenders, but the contrary, that he
will immediately lend it and deal and obtain earnings with it, because how
can those who give 7 and 10 percent to those who give them monies leave
the monies which are thus placed with them in deposit idle? And even if it
were very certain that you do not sin (which it is not, but the contrary), it
is very sure that the moneylender sins lending your monies, and that he
steals the patrimony of your neighbors with your money.”" The doctrine
of Saravia de la Calle is, therefore, quite clear: the use of money that is
deposited at demand with the bankers, which in their own interest grant
loans, is illegitimate and implies a grave sin. This doctrine fully coincides
with the doctrine which was established by the classical authors on Ro-
man Law and arises naturally from the essence, purpose and legal nature
of the contract for the demand deposit of money."*

Saravia de la Calle is also very emphatic when talking about the
enormous profits that the bankers receive from their illegitimate behav-
ior of appropriating the deposits of their depositors, instead of being

01bid., p. 195.
Ubid., p. 196.
21pid., p. 197.
B1pid.

14Gee Jesiis Huerta de Soto, “A Critical Analysis of Central Banks and Fractional-
Reserve Free Banking from the Austrian School Perspective,” Review of Austrian
Economics 8, no. 2 (1995): 25-38, esp. pp. 29-30 n. 6.


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66 The Review of Austrian Economics Vol. 9, No. 2

content with the lesser remuneration which they would receive for the
simple safekeeping or custodial oversight of the deposits, like good fa-
thers of families. Let us see how vividly he expresses this: “And if you
receive wages, they should be moderate, for you to support yourselves,
and not such excessive robberies that you build superb houses and pur-
chase rich property, have excessive costs of family and servants, and hold
great banquets and dress in such a costly fashion, especially when you
were poor when you began to lend and left poor trades.” Saravia de la Calle
indicates how the bankers have a great tendency to become bankrupt,
even making a brief theoretical analysis which shows that, after the
expansionary phase resulting from the artificial expansion of the cred-
its which these logreros (“moneylenders”) grant, there inevitably
comes a phase of recession in which the bad debts cause a chain of
bankruptcies among the banks. And he adds that, “if the merchant
does not pay the moneylender, it makes him bankrupt, and thus he
suspends payments and all is lost, of all which, as is notorious, these
moneylenders are the beginning, occasion and cause, because if they did
not exist, each person would trade with his money as he could and no more,
and thus things would cost their just price and more than the price in cash
would not be charged. And, therefore, it would be a great advantage if the
princes did not consent to them in Spain, as no other nation in the world
consents to them, and banished them from their court and kingdom.”
As we know, it is not true that the governors of other nations had had more
success in controlling the activity of the bankers or lenders than in Spain,
as more or less the same was occurring everywhere and the kings ended up
by granting privileges for the bankers to carry on their activities using the
money of their depositors for their own interest, in return for also being able
to take full or partial advantage of a banking system from which they
obtained funds much more easily and rapidly than from taxes.

As a conclusion to his analysis, Saravia de la Calle states that “un-
der no circumstance should the Christian give his monies to these
lenders because, if he sins in giving them, as he always sins, he should
cease it because it is his own sin; and if he does not sin, he should cease
it in order to avoid the sin of the moneylender.” Moreover, Saravia de
la Calle adds that, if the bankers are not used, there will be the addi-
tional advantage that the depositors “will not be startled if the lender
suspends payments; if he becomes bankrupt, as we see so commonly
and our Lord God permits, they and their owners will be lost like an
ill-gained thing.”"” As we can see, Saravia de la Calle’s analysis, in

Saravia de la Calle, Instruccion de Mercaderes, p. 186.
pid. p. 190; emphasis added.
Ibid, p. 198.


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 67

addition to its ingenuity and humor, is impeccable and has no contra-
dictions, except, perhaps, that it puts too much emphasis on the criti-
cism ofthe bankers for charginginterest, which violated the canonical
prohibition of usury, rather than for their undue appropriation of the
demand deposits placed with them by their clients.

Martin de Azpilcueta Navarro

Another writer who made a correct analysis of the contract for the de-
mand deposit of money is Martin de Azpilcueta, better known as “Doc-
tor Navarro,” in his book Comentario Resolutorio de Cambios (Resolu-
tory Commentary on Exchanges), first published in Salamanca at the
end of 1556. Martin de Azpilcueta expressly refers to “banking for safe-
* keeping,” which is the monetary demand-deposit transaction per-
formed by the banks. For Martin de Azpilcueta, banking for safekeep-
ing or the demand-deposit contract is completely fair and consists of
the banker being the “warden, depositary and guarantor of the monies,
which those who give him or send to him give to him or bank with him
for what may be necessary; and that he is obliged to pay to the mer-
chants, or to the persons whom the depositors wish in such or such a
way, for which he may licitly take his fair wage, either from the repub-
lic or from the depositors; because this trade and duty is useful to the
republic and does not contain any iniquity, as it is fair that he who
works earns his wage. And the banker works in receiving, holding in
deposit and ready the money of so many merchants, and in writing,
giving and keeping accounts with all of them, with great difficulty, and
sometimes danger of errors in reckoning and other things. The same
could be done with a contract with which a person committed himself
to the others to receive and hold their money in deposit, give, pay and
keep the accounts of all of them, as they tell him, etc., because this con-
tract is of hire to another and from another of his works and employment,
which is a designated, just and holy contract.” As we can see, for Martin
de Azpilcueta, the contract of a demand deposit is a fully legitimate con-
tract, which consists of entrusting the safekeeping, custody or deposit of
money to a professional, the banker, who should care for it like the good
father of a family, always keeping it at the depositor’s disposal and per-
forming the cashier services requested by the latter on his behalf. In re-
turn, he will have the right to receive the appropriate remuneration of

Martin de Azpilcueta, Comentario Resolutorio de Cambios (Madrid: Consejo
Superior de Investigaciones Cientificas, 1965), pp. 57-58. When studying the position
of Doctor Navarro, I have worked with the first Spanish edition published by Andrés
de Portonarijs in Salamanca in 1556, and also with the first Portuguese edition
published by Ioam de Barreyra in Coimbra in 1560 with the title Comentario Resolu-
torio de Onzenas. The quotes contained in the main text appear in the Portuguese
edition on pp. 77-80, and on pp. 74-75 of the first Spanish edition.


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68 The Review of Austrian Economics Vol. 9, No. 2

his services from the depositors. In effect, for Martin de Azpilcueta, the
depositors should pay the depositary or banker, never vice versa, so that
the depositors “pay the former for the work and care of the banker in
receiving and keeping their money and doing his work" and, therefore,
the bankers should perform “their trade cleanly and be content with a
just wage, receiving it from those who owe it to them and whose money
they safeguard and accounts they keep and not from those who do not
owe it to them.”"® Moreover, in order to avoid confusion and make
things perfectly clear, Martin de Azpilcueta, along the same lines as
Doctor Saravia de la Calle which we have seen above, expressly con-
demns the clients who do not wish to pay for the services of custody of
their deposits or even try to receive interest on them. Thus, Doctor
Navarro concludes that “in this type of exchange, not only the bankers
sin, but, even. . . those who give them monies for them to keep, and do
the same. And afterwards they do not want to pay them anything, say-
ing that that which they earn with their money, and will receive from
those to whom they pay in cash, suffices for their wages. And if the
bankers ask them for anything, they leave them and go to deal with
others, and so that they do not leave them, the bankers renounce the
wage owed to them and take it from who does not owe it.”

The Contribution of Tomas de Mercado

Tomas de Mercado, in his Suma de Tratos y Contratos (“Compilation
of Deals and Contracts”), Seville, 1571, makes an analysis of the bank-
ing business which follows a very similar line to the two above authors.
Firstly, he points out, following the correct doctrine, that the deposi-
tors should pay the bankers for the work of keeping their monetary
demand deposits, concluding that “for all of them it is a common and
general rule to be able to take wages from those who place money
in their bank, either a certain amount each year or a certain amount
for each thousand, as they serve them and keep their patrimony.”
However, Tomas de Mercado ironically mentions that the bankers of
Seville are so “generous” that they do not make any charge for the cus-
tody of the deposits, using the following words: “those of this city, it is
true, are so regal and noble that they do not ask for or take any wage.”

“Ibid. pp. 60-61.
Ibid. p. 61.

23 quote the edition by the Instituto de Estudios Fiscales published in Madrid in
1977, edited and introduction by Nicolas Sanchez Albornoz, vol. 2, chap. 16, p. 479.
There is another edition, by Restituto Sierra Bravo, published by the Editora Nacional
in 1975, which includes the quote given in the main text on p. 401. The original edition
was published in Seville in 1571 “en casa de Hernando Diez Impresor de Libros, en la
calle de la Sierpe.”


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 69

And Tomds de Mercado remarks that the bankers of Seville do not
need to charge anything as, with the large amount of money they ob-
tain from the deposits, they carry out their private businesses,
which are very lucrative. We should stress the fact that, in our opin-
ion, the analysis made by Tom&ds de Mercado in this respect refers
simply to an observation of a fact, and does not imply any accep-
tance of its legitimacy, as several modern critics appear to suggest.
To the contrary, following the purest, classical-Roman doctrine and
the essence of the legal nature of the contract for the demand deposit
of money, Tomas de Mercado is the scholastic writer who most clearly
shows that the transfer of property which occurs in the monetary bank
deposit does not imply a parallel transfer of availability and, therefore,
for practical purposes, a full transfer of property does not take place.
Let us see how clearly he expresses this: “[the bankers] must under-
stand that the money is not theirs but belongs to someone else, and
that is not all, when they have it serve them, it ceases to serve its
owner.” Tomas de Mercado adds that the bankers should be subject to
two basic principles, the first, “not to leave the bank so bare that they
cannot then pay the drafts which come, because, if they make it impos-
sible to pay them, spending and employing money in investments and
speculative earnings or other deals, it is certain that they sin. .. The
second: they should not enter dangerous businesses, because they sin,
even if they result favorably, due to the danger of behaving wrongly
and doing grave damage to those who trusted them.”?

Although it is true that, with these recommendations, it seems as
if Tomds de Mercado would admit the use of a certain fractional-re-
serve ratio, the fact is that he is very forthright in expressing his le-
gal opinion that, in the final analysis, the money of the deposits does
not belong to the bankers but to the depositors and when he says, more-
over, that no banker heeds his two recommendations: “but in the case
of earning, when it is comfortable, it is very difficult to restrain ava-
rice, none of them heeds these two warnings, nor meets these condi-
tions.” Therefore, he considers very favorably the enactment of a rule
prohibiting the bankers from doing private business, in order to re-
move the temptation implied by financing them indefinitely with the
money obtained from demand deposits.

In addition, elsewhere in Suma de Tratos y Contratos, at the end of
chapter 4, Tomas de Mercado tells us that the bankers of Seville act as
depositaries for the money and precious metals of the merchants from

22Tomas de Mercado, Suma de Tratos y Contratos, vol. 2, p. 480 of the edition of
Instituto de Estudios Fiscales and p. 401 of the edition of Restituto Sierra Bravo.

231bid., p. 480.


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70 The Review of Austrian Economics Vol. 9, No. 2

the fleet of the Indies and that, with such substantial deposits “they make
great investments” and obtain lucrative profits, now without expressly
condemning this type of activity, although it is true that the passage in
question is a description of a state of affairs rather than an analysis of
the legitimacy of the situation. This analysis is made in much more depth
in chapter 16, which we have discussed above. Tomas de Mercado con-
cludes, moreover, that the bankers “also become involved in giving and
taking in exchange and in collecting, and a banker in this republic cov-
ers a whole world and embraces more than the ocean, although some-
times he leaves so many loose ends that everything goes to ruin.”*

The Cases of Domingo de Soto, Luis de Molina and Juan de Lugo

The scholastics who are most confused on the doctrinal treatment of
the contract for the monetary bank deposit are Domingo de Soto and,
above all, Luis de Molina and Juan de Lugo. In fact, these theorists
allowed themselves to be influenced by the wrong medieval tradition
of the glossators and, especially, by the doctrinal confusion which de-
veloped due to the concept of depositum confessatum. This was simply
a loan which was disguised as a deposit in order to evade the canonical
prohibition on charging interest, as this practice was considered ac-
ceptable if there was a (fictitious) delay on the part of the depositary.
In fact, de Soto and, above all, Molina wrongly considered that the de-
mand deposit was merely a “loan” which transferred not only the prop-
erty, but also the full availability of the deposits to the banker and,
therefore, it could be considered legitimate to use them as loans, pro-
vided that these were made “prudently.” It may be implied that Dom-
ingo de Soto was the first to uphold this thesis, although very indi-
rectly. In fact, in Book VI, Question XI of his work on De Iustitia et Iure
(On Justice and Law) (1556), we can read that, among the bankers,
there was “the custom, it is said, that if a merchant makes a bank de-
posit in cash, as a result thereof the banker answers for a higher
amount. I delivered ten thousand to the moneychanger, then he will
answer for me for 12, perhaps 15; because it is very good earning for
the banker to have money in cash. Neither is any vice found
therein.”” Another case of typical credit creation which seems to be

24This is the quote from Mercado that Ramén Carande includes in Vol. 1 of Carlos
V y sus Banqueros in the introduction to his analysis of the bankers of Seville and the
crisis which led them all into bankruptcy. See Tomds de Mercado, Suma de Tratos y
Contratos, vol. 2, pp. 381-82 of the 1977 edition by Instituto de Estudios Fiscales and
p. 321 of the edition by Restituto Sierra Bravo.

25According to Restituto Sierra Bravo, El Pensamiento Social y Econémico de la
Escoldstica, vol. 1 (Madrid: Consejo Superior de Investigaciones Cientificas, 1975), p.:
215, this phrase of Domingo de Soto implies his acceptance of the banking business
with a fractional-reserve ratio.


===== PAGE 13 =====

Huerta de Soto: New Light on the Prehistory of the Theory of Banking 71

admitted by Domingo de Soto is that of a loan in the form of the dis-
count of bills financed against the demand deposits of the clients.
But perhaps the member of the School of Salamanca who upheld
the most erroneous doctrine in relation to the contract for the demand
deposit of money made by the bankers was Luis de Molina.” In fact,
Luis de Molina, in his Tratado sobre los Cambios (“Treatise on Ex-
changes”), upholds the medieval doctrine that the demand deposit is
merely a “loan” contract in favor of the banker, which transfers not
only the property, but also the full availability of the thing and, there-
fore, the banker can legitimately use it in his own interest, in the form
of loans or in any other way. Let us see how he expresses his argument:
“because these bankers, like all the rest, are the true owners of the
money which is deposited in their banks, in which they are greatly
differentiated from the other depositaries . . . in such a way that
they receive it as a loan with no rights attached and, therefore, at
their own risk”; and, elsewhere, further on, he again repeats that
“such a deposit is really a loan, as has been said, and the property of
the money deposited passes to the banker and, therefore, in the event
that it perishes, it perishes for the banker.” This doctrinal position is
a clear lapse and contradicts what the writer himself says in his other
work, Tratado sobre los Préstamos y la Usura (“Treatise on Loans and
Usury”), where he warns that the term is an essential element of any
loan contract and that, if the time for which a loan may be held is not
expressly stated (as happens in a demand deposit) and no date has
been fixed for its repayment, “it will be necessary to abide by what the
judge judges as to the time for which it may be held.”®® In addition,
Luis de Molina ignores the fact that the nature and legal essence of
the demand deposit contract has nothing to do with the loan contract
and, therefore, his doctrine which tries to identify the one with the
other is a clear regression, not only in relation to the much more co-
herent positions of Saravia de la Calle and Azpilcueta Navarro, but
also in relation to the true legal nature of the contract as it had been
developed by the old Roman legal tradition. It is, therefore, surpris-
ing that so clear and profound a mind as that of Luis de Molina did

264 is very significant that various authors, among them Marjorie Grice-Hutchin-
son, are in doubt as to whether Luis de Molina should be included among the theorists
of the School of Salamanca: “The inclusion of Molina in the School seems to me now to
be more dubious.” Marjorie Grice-Hutchinson, “The Concept of the School of Salamanca:
Its Origins and Development”, Chapter 2 of Economic Thought in Spain: Selected
Essays of Marjorie Grice-Hutchinson, p. 25.

27Luis de Molina, Tratado sobre los Cambios, edition and introduction by Francisco
Gomez Camacho (Madrid: Instituto de Estudios Fiscales, 1990), pp. 137-40.

281bid., p. 13.


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72 The Review of Austrian Economics Vol. 9, No. 2

not realize how extremely dangerous it was to accept the violation of
the general legal principles on the bank deposit and to say that “it
never occurs that all the depositors need their money in such a way
that they do not leave many thousands of ducats in deposit with which
the bankers may do business to obtain profits or losses.” Molina did
not realize that not only the objective or essential purpose of the con-
tract, which is the safekeeping and custody of money, is thus violated,
but that all kinds of illicit businesses and abuses are encouraged,
which inexorably generate an economic recession and bankruptcy of
the bankers. If the traditional legal principle which requires the con-
tinual safekeeping of 100 percent of the tantundem in favor of the de-
positor is not met, there is no clear guideline for avoiding bankruptcy
of the bankers. And it is evident that such superficial and vague sug-
gestions as to “try to act with prudence” or “not get involved in danger-
ous business” are insufficient to avoid the very prejudicial economic
and social effects of fractional-reserve banking. However, Luis de
Molina does at least take the trouble to point out that “a warning
should be given that (the bankers) are in mortal sin if they commit
the money they hold in deposit in their businesses to such an extent
that they then find themselves unable to deliver, at the appropriate
moment, the amounts which the depositors request or order to be
paid against the money which they hold in deposit. . . Likewise, they
are in mortal sin if they engage in such businesses that they are in
danger of reaching a situation in which they cannot pay the deposits.
For example, if they send so much merchandise overseas that, if the
ship is wrecked, or if it is captured by pirates, it is not possible for them
to pay the deposits, even if they sell their patrimony. And not only are
they in mortal sin when the business ends badly, but even if the outcome
"is favorable. And this is due to the danger to which they expose them-
selves of causing damage to the depositors and guarantors which they
themselves contributed for the deposits.” We consider this warning by
Luis de Molina to be commendable, but we also consider it extraordi-
nary that, it seems, he did not realize that it is, in the final analysis,
intimately contradictory to his express acceptance of fractional-re-
serve banking, provided that the bankers practice it with “pru-
dence.” And it does not matter how prudent the bankers are, the only
way to avoid risks and to guarantee that the depositors’ money is al-
ways at their disposal is by maintaining a cash ratio of 100 percent of
all the demand deposits received.

21bid., p. 137.
1bid., pp. 138-39; emphasis added.


===== PAGE 15 =====

Huerta de Soto: New Light on the Prehistory of the Theory of Banking 73

After Molina, the only author who upheld an analogous position on
banking is Juan de Lugo,” also a Jesuit. In our opinion, this can lead us
to consider that, in relation to banking, there were two schools of thought
within the School of Salamanca: one, well-founded and doctrinally correct
(close to the future “currency school”), to which Saravia de la Calle, Azpil-
cueta Navarro and Tomas de Mercado belonged; and another, more inclined
towards the capriciousness of the inflationist doctrine and the fractional
reserve (close to the future “banking school”), represented by Luis de
Molina, Juan de Lugo and, to a much less extent, Domingo de Soto. We
will study these two points of view in more detail in the next section.

The School of Salamanca: Banking and Currency View

The contributions of the theorists of the School of Salamanca in the
monetary field are important and have been the subject of detailed
studies.”

The first scholastic treatise which dealt with money was written
by Diego de Covarrubias y Leyva and published in 1550 under the title
Veterum Collatio Numismatum (“Compilation on old moneys”). In this work,
the famous Bishop of Segovia studied the history of the devaluation of the
Castilian maravedi and compiled a large number of statistics on the evo-
lution of prices. Although the essential ideas of the quantity theory of
money are already implicit in Covarrubias’ treatise, he does not put
forward an explicitly articulated monetary theory.* Some years were to
pass before, in 1556, Azpilcueta Navarro expressed, for the first time,
clearly and convincingly that the increase in prices, if one prefers, the
decrease in the purchasing power of money, was the result of the increase
in the monetary supply which was taking place in Castile as a result of
the massive inflow of precious metals from America.

IR P. Joannis de Lugo Hispalensis, S.1., Disputationum de lustitia et lure, Tomus
Secundus (Lugduni, 1642), Disp. 28, Sec. 5, pp. 406-7. I would like to thank the Jesuit
Father Prof. Enrique M. Urea and the Dominican Father Rodrigo T. Hidalgo who
provided me with different copies of de Lugo’s original book.

#2366, above all, the doctoral thesis which Marjorie Grice-Hutchinson published
under the direction of FA. Hayek with the title of The School of Salamanca: Readings
in Spanish Monetary Theory, 1544-1605; Murray N. Rothbard, “New Light on the
Prehistory of the Austrian School,” pp. 52-74; Alejandro A. Chafuen, Christians for
Freedom: Late-Scholastic Economics (San Francisco: Ignatius Press, 1986), pp. 74-86;
and Murray N. Rothbard, Economic Thought before Adam Smith: An Austrian Perspec-
tive on the History of Economic Thought, vol. 1, pp. 101-27.

*3The edition which I have used is the Omnia Opera, published in Venice in 1604,
which includes the treatise on money by Diego de Covarrubias in vol. 1, under the full
title of Veterum Collatio Numismatum, cum his, quae modo expenduntur, publica, et
Regia authoritate perpensa, pp. 669-710. This work by Diego de Covarrubias is often
quoted by Davanzati and, at least once, in chap. 2 of Galiani’s famous Della Moneta,
written in 1750. Also, and most significantly, it is quoted by Carl Menger, Grundsdtze der
Volkswirthschuftslehre (Vienna: Wilhelm Braumiiller, 1871), p. 257; English edition, Princi-
ples of Economics (New York and London: New York University Press, 1981), p. 317.


===== PAGE 16 =====

74 The Review of Austrian Economics Vol. 9, No. 2

In fact, the relationship between the amount of money in circula-
tion and prices is impeccably expressed by Martin de Azpilcueta, for
whom “in the lands where there is a great shortage of money, all the
other things which may be sold, even the labor and work of men, are
given for less money than in places where there is an abundance; as
can be seen from experience, in France, where there is less money than
in Spain, bread, wine, clothing, labor and work cost much less; and
even in Spain, at the time when there was less money, the things which
could be sold and the labor and work of men were given for much less
than after the Indies were discovered and covered her with gold and
silver. The cause of which is that money is worth more where and when
it is lacking than where and when it is in abundance.”

However, in contrast to the deep and detailed studies which have
been made of the monetary theory of the School of Salamanca, up to now
there has been practically no effort to analyze the position of the scholastics
in relation to banking.’ And nevertheless, as we have seen in preceding
sections, the theorists of the School of Salamanca made a very acute
analysis of banking practices and, to a great extent, were the forerun-
ners of the opposing positions which, more than two centuries later,
were reproduced in England in the controversy between the members
of the banking school and those of the currency school.

In fact, we have already set out the profoundly critical treatment
of fractional-reserve banking which we owe, mainly, to Doctor Saravia
de la Calle and which is included in the final chapters of his Instruccién
de Mercaderes. Martin de Azpilcueta and Tomas de Mercado also de-
veloped a rigorous and very demanding critical analysis of banking
activities which, although it did not reach the degree of criticism of
Saravia de la Calle, included an impeccable treatment of the de-
mands which, in accordance with justice, should be observed in the
monetary-bank-deposit contract. For this reason, and due to their rig-
orous critical analysis of banking, we may consider this first group of
authors (most of them Dominicans) to form part of an incipient cur-
rency school, which had been developed from the start within the
School of Salamanca and which characterized by upholding coher-
ent and rigorous positions in respecting the legal demands of the
monetary-bank-deposit contract and by being, in general, very critical
and distrustful of the practice of banking activities.

dd ~ Martin de Azpilcueta, Comentario Resolutorio de Cambios, pp. 74-75; emphasis
added.

**Not even in the most brilliant and recent work by Murray N. Rothbard,
Economic Thought before Adam Smith, vol. 1, to which the present article should be
considered a humble addendum.


===== PAGE 17 =====

Huerta de Soto: New Light on the Prehistory of the Theory of Banking 75

In opposition to this first group of theorists, a second group of “mem-
bers” (most of them Jesuits) of the School of Salamanca can be clearly dis-
tinguished. This group would be led by Luis de Molina and also included
Juan de Lugo and, to a lesser extent, Lessius and Domingo de Soto. These
authors followed the leadership of Molina and, as we have already ex-
plained, are characterized by the wrong legal foundations which they give
to the monetary-bank-deposit contract and by admitting that a fractional
reserve be permitted, arguing that, more than a deposit, it is a “loan” con-
tract. This is not the place to reproduce all the arguments against the po-
sition of Molina respecting the monetary bank deposit contract which
merely repeat an error that, very much influenced by the depositum con-
fessatum, had been upheld throughout the Middle Ages by the glossa-
tors. What we wish to emphasize here is that this second group of
authors of the School of Salamanca was much more “comprehensive”
with banking activities and even fully justified the practice outside the
framework of traditional legal principles. It is not, therefore, inappro-
priate to consider this second group of authors to form part of an incipi-
ent banking school within the School of Salamanca who, like their suc-
cessors of the English and continental banking school several centu-
ries later, not only justified the practice of banking based on a frac-
tional reserve, that is to say, violating basic legal principles, but also
believed that this had very beneficial effects on the economy.

Although Luis de Molina’s theoretical arguments on the bank deposit
contract are a clear regression and cannot be upheld on the basis of tradi-
tional legal principles, it is, however, curious to draw attention to the
fact that this author is the first member of the banking school tradition
who was capable of realizing that checks and documents ordering pay-
ment at sight of specific amounts charged against the deposits fulfilled
exactly the same function as cash. The assertion that it was the theo-
rists of the English banking school who, in the nineteenth century,
first generally argued that the demand deposits of the banks formed
an integral part of the monetary supply and thus had the same effect
on the economy as banknotes is, therefore, incorrect. More than two
centuries earlier, Luis de Molina had already shown this idea clearly in
Disp. 409 of his Tratado sobre los Cambios. Luis de Molina tells us that
“the money is paid to the bankers in two ways: one, in cash, handing over
the coins to them; and the other, by trade bills or any other bills which are
given to them, by virtue of which he who has to pay a bill becomes a debtor
to the bank for the amount which the bill indicates will be paid into the ac-
count of he who presents the bill at the bank.”™® Specifically, Luis de Molina

361 uis de Molina, Tratado sobre los Cambios, p. 145.


===== PAGE 18 =====

76 The Review of Austrian Economics Vol. 9, No. 2

refers to the written documents, which he calls in Latin chirographis pe-
cuniarum, which were used as payment in the majority of market trans-
actions. Thus, “although many transactions are made in cash, the major-
ity are made by written documents which evidence either that the bank
owes to them or that it agrees to pay, and the money remains in the bank.”
Molina also says that these cheques are drawn with “sight” or demand
value and adds that “these payments are usually called ‘sight’ because
the money must be paid at the moment the bill is presented and read.”
But most importantly Molina expressed, much earlier than Pen-
nington in 1826,” the essential idea that the total volume of monetary
transactions carried out at a market could not be paid with the amount
of cash which changed hands there, if it were not for the use of the money
which the banks generate by their deposit entries and the issue of checks
against them by the depositors. So that, thanks to the financial activity
of the banks, a new amount of money is created from nowhere in the form
of deposits, and is used in the transactions. In fact, Molina expressly tells
us that “the majority of the transactions are previously carried out (are
formalized) by signed documents; as money is not so abundant as to be able
to buy in cash the enormous quantity of merchandise which is taken there to
sell, if they must be paid for in cash, nor to be able to carry out so much
business.” Lastly, Molina distinguishes very clearly between those op-
erations which imply the grant of credit, as payment of a debt is temporarily
postponed, and those which are carried out paying by check or by charging
the amount to a bank account, concluding that “it should be observed that it
is not considered that credit is bought if the price is charged to the bank
account itself, even if at the time cash is not paid; as the banker will pay
in cash the debit balance which exists, at least at the end of the market.”
Juan de Lugo follows firmly and absolutely the doctrine of Molina
and erroneously considers, in the same way as the latter, that the
monetary bank deposit is a “loan” which permits that, until the deposi-
tors require it, it may be used for the banker’s private business.

371bid., p. 146.

3BSee James Pennington’s memo dated February 13, 1826 “On the Private Banking
Establishments of the Metropolis,” included as an Appendix in Thomas Tooke, A Letter
to Lord Grenville; On the Effects Ascribed to the Resumption of Cash Payments on the
Value of the Currency (London: John Murray, 1826); Murray N. Rothbard, Classical
Economics: An Austrian Perspective on the History of Economic Thought (Aldershot,
England: Edward Elgar, 1995), vol. 2, pp. 230-33; and FA. Hayek, “The Dispute
Between the Currency School and the Banking School, 1821-1848,” Chap. 12 of The
Trend of Economic Thinking: Essays on Political Economists and Economic History,
W.W. Bartley, III, and Stephen Kresge, eds., vol. 3 of The Collected Works of FA. Hayek
(London: Routledge, 1991), p. 224.

Luis de Molina, Tratado sobre los Cambios, p. 147

O1hid., p. 149.

De Cambiis,” R. P. Joannis de Lugo Hispalensis, Societatis Iesw Disputationum
de lustitia et lure, Tomus Secundus, Lugduni 1642, p. 406, Section 5, No. 60.


===== PAGE 19 =====

Huerta de Soto: New Light on the Prehistory of the Theory of Banking 77

Molina and Lugo uphold such a confused position in respect to
their legal foundations for the bank deposit contract that they even ad-
mit that the contract may simultaneously (!) have a different legal na-
ture, depending on the party under consideration (in other words, it may
be a deposit for the depositor and a loan contract for the depositary
banker). Apparently, they do not see any incongruence in this position
and, as we know, in respect of the bankers’ activity, they fix only one
limit: that they should act with “prudence” so that, by virtue of the law
of large numbers, they always have sufficient liquidity to allow the re-
turn of the deposits which are “normally” demanded from them. They
do not realize that the criterion of prudence which they declare, is not
an objective criterion that can guide the bankers’ actions. It evidently
does not coincide with the capacity to return the deposits held at any
given moment and they themselves take great care to emphasize that the
bankers are in “mortal sin” when they employ the funds of their deposi-
tors in imprudent and speculative activities, even if they have a favorable
result and they are able to return the money to the depositors on time.**
Moreover, the criterion of prudence is not, in itself, sufficient: one can be
very prudent and, however, not be very shrewd or even have bad luck in
business, so that, when the moment arrives, sufficient liquidity is not
available and the deposits cannot be returned.*® What, then, does the cri-
terion of prudence consist of? It is clear that there is no objective reply to
this question which could serve as a guide for the bankers’activities. Par-
ticularly when the law of large numbers is not applicable to fractional-re-
serve banking, since the credit expansion which it causes leads to the gen-
eration of recurrent cycles of boom and depression which, inevitably,
place the bankers in difficult situations. And the fact is that fractional-
reserve banking itself, as shown by the Austrian theory of the business
cycle, generates liquidity crises and, therefore, the generalized insolvency
of the banks. In any case, at the moment of the crisis, it is very possible
that the bank cannot pay, in other words that it must suspend payments,
and, even ifall its creditors are lucky enough to finally collect their money,
this will only happen, in the best of circumstances, after a long period of
liquidation during which the role of the depositors will change, as they
will lose the immediate availability of their money and become compul-
sory savers, who will be obliged to postpone collection of their deposits
until the moment when the orderly liquidation of the bank culminates.

“Ibid. pp. 406-7.

That is to say, in the terminology of Israel M. Kirzner, “Economics and Error,” in
Perception, Opportunity and Profit (Chicago: University of Chicago Press, 1979), pp.
120-36, committing sheer or pure entrepreneurial error (which cannot be insured by
the law of large numbers) which causes serious entrepreneurial losses, regardless of
the degree of prudence with which one has acted.


===== PAGE 20 =====

78 The Review of Austrian Economics Vol. 9, No. 2

The above considerations are those which, without any doubt, lead
Tomas de Mercado to indicate that the principles of prudence declared by
Molina and Juan de Lugo constitute an objective which, in practice, no
banker can meet. It seems as if Tomas de Mercado was aware that such
principles did not serve as a practical guide in order to guarantee the
solvency of the banks. And, if such principles are not efficient in per-
manently attaining the objective of solvency and liquidity, it is evident
that a fractional-reserve banking system will not be able to meet its
commitments under all conceivable circumstances.

The Contemporary Positions of the
Jesuits Bernard W. Dempsey and Francisco Belda

In the present century, two Jesuit economists have again studied the
doctrine of the scholastics concerning banking, one from the stand-
point of the banking school and the other from the position of the cur-
rency school. The former is the Spanish Jesuit Francisco Belda, author
of an interesting work entitled “Etica de la creacién de créditos segun
la doctrina de Molina, Lesio y Lugo” (“Ethics of the creation of credits
according to the doctrine of Molina, Lessius and Lugo”).*! In fact, for
Father Belda it is evident that “from Molina’s description, it may be
deduced that, in the case of the bankers, there is authentic credit crea-
tion. Thanks to the intervention of the banks, a new purchasing
power has been created, which did not exist previously. The same
money is used simultaneously twice; the bank uses it for its busi-
ness and so does the depositor. The overall result is that the payment
means that circulation is several times greater than the real amount
of money in cash which was originated by them and the bank benefits
from all these transactions.” Moreover, Belda considers that, for
Molina, “it is licit to do business with the clients’ deposits, provided
this is done prudently, not risking being unable to meet one’s obliga-
tions on a timely basis.”

With regard to Juan de Lugo, Belda indicates that he gives “a me-
ticulous description of the bankers’ practices. Here, there is explicit
approval of credit creation, although not with the formal appearance of
created credit. The banks do business with the deposits of their clients
who, in turn, are not denied the use of their own money. There is an ex-
pansion of the payment means, produced by the banks through credits,
the discount of trade bills and other economic activities carried on with
the money of others. The final result is an increase in the purchasing

“Published by the journal Pensamiento: revista trimestral de investigacion e
informacion filosdfica publicada por las Facultades de Filosofia de las Compariias de
Jesus en Espana 73, vol. 19 (January-March 1963): 64-89.

*3Ibid., pp. 63 and 69.


===== PAGE 21 =====

Huerta de Soto: New Light on the Prehistory of the Theory of Banking 79

power in the market very much greater than the amount represented
by the cash deposits from which it originates.”

It is evident that Belda is correct in indicating how the doctrines of
Molina and Lugo are, from among those of the scholastics, the most fa-
vorable towards the banking business. However, we are obliged to criti-
cize Father Belda for not even mentioning the positions of the other
members of the School of Salamanca, specifically those of Tomas de
Mercado and, above all, of Martin de Azpilcueta and Saravia de la
Calle, which are much more rigorous and critical when analyzing the
banking institution. Moreover, Belda’s analysis of the contributions of
Molina and Lugo is based on a Keynesian conception of the economy,
which not only ignores all the negative effects which credit expansion pro-
vokes in the structure of production, but also considers it to be highly bene-
ficial to the extent that it increases the “effective demand” and national
income. Belda’s analysis is, therefore, a study of the contributions of
the members of the School of Salamanca from the point of view of
the Keynesian and banking schools and is extremely confused re-
garding the legal justification of the institution of the monetary
bank deposit, tending, therefore, to consider fractional-reserve bank-
ing to be legitimate.

There is, however, an economic treatise by another notable Jesuit,
Father Bernard W. Dempsey, entitled Interest and Usury,*” in which
he analyzes the position of the members of the School of Salamanca on
the banking business employing a profound knowledge of monetary
and capital theory, very much superior to that of Father Belda.*®

Curiously enough, Dempsey develops his thesis, not by analyzing
the positions of the theorists of the School of Salamanca who are most
unfavorable to banking activity (Saravia de la Calle, Martin de Azpil-
cueta Navarro and Tomas de Mercado), but by concentrating on the
works of the representatives who are closest to the banking school,
Luis de Molina, Juan de Lugo and Lessius, making an interpretative

461pid., p. 87. The reference to Juan de Lugo corresponds to Disputationum de
Iustitia et Ture, Tomus Secundus pp. 60-62.

4"Bernard W. Dempsey, Interest and Usury, published with an introduction by
Joseph A. Schumpeter (Washington, D.C.: American Council of Public Affairs, 1943).
Attention should be drawn to the fact that Father Belda’s article arose as a criticism,
from the Keynesian point of view, of the theses upheld by Dempsey in this book. I
would like to thank Professor James Sadowsky of Fordham University, who provided
me with a copy of Dempsey’s book, which was not available in Spain.

“8Father Dempsey’s broad theoretical knowledge and familiarity with the eco-
nomic doctrines of Ludwig von Mises, Friedrich A. Hayek, Wicksell, Keynes and others
is very much emphasized in Schumpeter’s “Introduction” to his book. Moreover, Schum-
peter quotes and praises Dempsey in his History of Economic Analysis (New York:
Oxford University Press, 1980), pp. 95-96 and 104.


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80 The Review of Austrian Economics Vol. 9, No. 2

study of the works of these authors which leads him to conclude that
from the point of view of their own doctrines, banking activity based on
fractional reserves would not be legitimate. Dempsey’s conclusion is
based on the application of the traditional principles on usury de-
fended by these authors to the banking institution and the economic
effects thereof which, although they were completely unknown at the
time the School of Salamanca was writing, had, however, already been
theoretically revealed by Mises and Hayek when Dempsey wrote his
book. In fact, although Molina and Lugo’s more favorable treatment of
banking must be acknowledged, Dempsey expressly indicates that the
loans which are created from nowhere by the banks, as a result of prac-
ticing their activity with a fractional reserve, means the generation of
purchasing power which does not require any prior saving or sacrifice and
gives rise to important damage to a large number of third parties, who see
how the purchasing power of their monetary units decreases as a conse-
quence of the inflationary credit expansion of the banks." According to
Dempsey, this creation of purchasing power from nowhere, which does not
imply any prior loss of other people’s purchasing power, is contrary to es-
sential legal principles, as constructed by Molina and Lugo themselves and,
in this respect, should be condemned. Specifically, Dempsey affirms that
“we may conclude from this that a Scholastic of the seventeenth century
viewing the modern monetary problems would readily favor a 100-per-
cent-reserve plan, or a time limit on the validity of money. A fixed money
supply, or a supply altered only in accord with objective and calculated
criteria, is a necessary condition to a meaningful just price of money.”

4%The credit expansion results in the depreciation of whatever circulating medium
the bank deals in. Prices rise; the asset appreciates. The bank absolves its debt by paying
out on the deposit a currency of lesser value . . . No single person perhaps would be
convinced by a Scholastic author of the sin of usury. But the process has operated
usuriously; again we meet systematic or institutional usury . . . The modern situation
to which theorists have applied the concepts of divergence of natural and money
interest, divergences of saving an investment, divergences of income disposition from
tenable patterns by involuntary displacements, all these have a sufficient common
ground with late medieval analysis to warrant the expression ‘institutional usury’ for the
movement heretofore described in the above expressions.” Father Bernard W. Dempsey,
Interest and Usury, pp. 225 and 227-28.

Orbig., p. 210. Incidentally, Father Dempsey points out that the theory of time
preference may even date from Saint Thomas Aquinas, as it was expressly stated by
one of the latter’s most brilliant pupils, Giles Lessines, for whom “future goods are not
valued so highly as the same goods available at an immediate moment of time, nor do
they allow their owners to achieve the same utility. For this reason, it must be
considered that they have a more reduced value in accordance with justice.” See p. 426
of Opusculum LXVI, De usuris in communi et de usurarum contractibus, written by
Aegidius Lessines in 1285 (quoted by Bernard Dempsey in Note 31 of p. 214). Dempsey’s
discovery of Lessines exposition of time preference was not included in Murray N.
Rothbard’s Economic Thought before Adam Smith, in which Rothbard considers San
Bernardino of Siena and Conrad Summenhart to have been in 1431 and 1499 the first
expositors of time preference theory (pp. 85 and 92).


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Huerta de Soto: New Light on the Prehistory of the Theory of Banking 81

Dempsey states that the credit expansion generated by the bank-
ing industry tends to depreciate the purchasing power of money, so
that the banks tend to return the monetary deposits claimed from them
in monetary units with an increasingly reduced purchasing power.” He
therefore correctly concludes that, if the members of the School of Sala-
manca had had a detailed theoretical knowledge of the functioning and
implications of the economic process to which fractional-reserve banking
gives rise, it would have been described as a perverse, vast and illegiti-
mate process ofinstitutional usury, even by Molina, Lessius, and Lugo
themselves.

®!This is the same argument given by the great libertarian Jesuit Juan de Mariana
in his book De monetae mutatione (On the Alteration of Money) published in 1609.
Mariana condemns as robbery any government debasement of coins whereas Dempsey
follows the same reasoning in relation to the even more disturbing credit inflation
created by banks. On Juan de Mariana see the most brilliant analysis of Murray N.
Rothbard, Economic Thought before Adam Smith, p. 119.