Medieval Boom and Bust
Gerard Jackson takes on Alan Wood and Robert Shiller on the cause of speculative asset price bubbles in Medieval booms and historical and economic amnesia. Wood, citing Shiller, identifies media hype as the cause of speculative manias. Jackson responds that boom and bust cycles have been evident in times and places without news media. The only constant is the presence of fractional reserve banking:
It's important to bear this fact in mind because credit expansion can only be produced by a fractional reserve system. And every boom has always been preceded by a rapid monetary expansion*. I do not know of a single exception.
Let us begin with Florence where in the late twelfth century a banking system began to develop. At first these banks adhered to a 100 per cent reserve. But human nature being what it is, they started to create phony credit by dropping their reserves. (Carlo M. Cipolla, The Monetary Policy of Fourteenth Century Florence, Berkeley University of California Press, 1982). Surprise, surprise, Florence found itself enjoying a boom —and not a single newspaper in sight — followed by a bust that was so sever that. Cipolla compared it to the Great Depression.
- Having made loans that greatly exceeded their deposits it was only a matter of time before a crisis was triggered. In this case several factors came to the fore: The banks had made heavy loans to Edward III of England who was now unable to repay them; Neapolitan princes made massive withdrawals — perhaps they smelt a rat — and there was an acute drop in the price Florentine government bonds. From 1341–1346 the crisis deepened and a number of the great banks collapsed. Credit was severely restricted triggering the inevitable deflation resulting in large-scale bankruptcies.