Fiduciary Media and Banking in Medieval Venice Revisited
By Richard C B Johnsson
Mises Institute Working Papers (2002)
Abstract: At the center of the trade and wealth of medieval Venice was the banking system, as Reinhold Mueller showed in his 1979 article, The Role of Bank Money in Venice 1300-1500 (Studi Veneziani). This was as system that built largely on trust, Mueller argues, and on the existence of what he calls fiduciary money (media). But in what sense did trust matter? In what sense was this important especially for the banking system? It turns out Mueller uses the term in a totally different way compared to Ludwig von Mises in his The Theory of Money and Credit. This paper discusses the distinction between Mueller’s and von Mises’ use of the word, especially its effect on system-wide bank failures, and concludes that Mises’ use makes a much richer analysis possible. From this, Mueller’s alleged evidence of the existence of fiduciary media and the alleged causes of the system-wide bank failures in Venice are re-examined. The result is that most of the evidence collapses, with two notable exceptions. Firstly, fiduciary media was created by Government intervention through (i) forced loans, (ii) by extending credit itself, or by (iii) by favoring the money creation by banks. Secondly, fiduciary media was created by, not by credit expansion over reserves as we are used to in the more modern era, but by reserve contraction. Thus, the causes of system-wide bank failures in Venice could very well have been other than what Mueller proposed, namely government intervention and poor clearing (the latter probably due to insecure property rights).