The Birth of Banking

Shylock was far from the only moneylender to discover the inherent weakness of the creditor,  especially when the creditor is a foreigner. In the early fourteenth century, finance in Italy had been dominated by the three Florentine houses of Bardi, Peruzzi and Acciaiuoli. All three were wiped out in the 1340s as a result of defaults by two of their principal clients, King Edward III of England and King Robert of Naples. But if that illustrates the potential weakness of moneylenders, the rise of the Medici
illustrates the very opposite: their potential power. Perhaps no other family left such an imprint on an age as the Medici left on the Renaissance. T w o Medici became popes (Leo X and Clement VII); two became queens of France (Catherine and Marie); three became dukes (of Florence, Nemours and Tuscany).
Appropriately, it was that supreme theorist of political power, Niccolô Machiavelli, who wrote their history. Their patronage of the arts and sciences ran the gamut of genius from Michel­ angelo to Galileo. And their dazzling architectural legacy still surrounds the modern-day visitor to Florence. Only look at the villa of Cafaggiolo, the monastery of San Marco, the basilica of San Lorenzo and the spectacular palaces occupied by Duke Cosimo de' Medici in the mid sixteenth century: the former Pitti Palace, the redecorated Palazzo Vecchio and the new city offices (Uffizi) with their courtyard running down to the River A r n o .

But what were the origins of all this splendour? Where did the money come from that paid for masterpieces like Sandro Botti­celli's radiant Birth of Venus? The simple answer is that the Medici were foreign exchange dealers: members of the Arte de Cambio (the Moneychangers' Guild). They came to be known as bankers (banchieri) because, like the Jews of Venice, they did their business literally seated at benches behind tables in the street. The original Medici bank (stall would be a better descrip­

tion) was located near the Cavalcanti palace, at the corner of the present-day via dia Porta Rossa and the Via dell' Arte della Lana, a short walk from the main Florentine wool market. Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers: a small-time clan,

notable more for low violence than for high finance. Between 1 3 4 3 and 1 3 6 0 no fewer than five Medici were sentenced to death for capital crimes.

 Then came Giovanni di Bicci de' Medici. It was his aim to make the Medici legitimate. And through hard work, sober living and careful calculation, he succeeded. In 1 3 8 5 Giovanni became manager of the Roman branch of the bank run by his relation Vieri di Cambio de' Medici, a moneylender in Florence. In Rome, Giovanni built up his repu­tation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican's coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some

base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another.

But Giovanni clearly saw even greater opportunities in his native Florence, whence he returned in 1397 . By the time he passed on the business to his eldest son Cosimo in 1 4 2 0 , he had established a branch of the bank in Venice as well as Rome; branches were later added in Geneva, Pisa, London and Avignon. Giovanni had also acquired interests in two Florence wool factories.

A banker on his bench: Quentin Massys, The Banker (1514)

Of particular importance in the Medici's early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank's books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money.

The libro segreto - literally the secret book - of Giovanni di Bicci de' Medici sheds fascinating light on the family's rise. In part, this was simply a story of meticulous bookkeeping. By modern standards, to be sure, there were imperfections. The Medici did not systematically use the double-entry method,

though it was known in Genoa as early as the 1 3 4 0 s . Still, the modern researcher cannot fail to be impressed by the neatness and orderliness of the Medici accounts. The archives also contain a number of early Medici balance sheets, with reserves and deposits correctly arranged on one side (as liabilities or vostro) and loans to clients or commercial bills on the other side (as assets or nostro). The Medici did not invent these techniques, but they applied them on a larger scale than had hitherto been seen in Florence. The real key to the Medicis' success, however, was not so much size as diversification. Whereas earlier Italian banks had been monolithic structures, easily brought down by one defaulting debtor, the Medici bank was in fact multiple related partnerships, each based on a special, regularly renegotiated con­tract. Branch managers were not employees but junior partners who were remunerated with a share of the profits. It was this decentralization that helped make the Medici bank so profitable.

With a capital of around 20,000 florins in 1402 and a payroll of at most seventeen people, it made profits of 151,820 florins between 1397 and 1420 - around 6,326 florins a year, a rate of return of

32 per cent. The Rome branch alone was soon posting returns of over 30 per cent. 36 The proof that the model worked can be seen in the Florentine tax records, which list page after page of Giovanni di Bicci's assets, totalling some 91 ,000 florins.

Detail from a ledger of the Medici bank

When Giovanni died in 1429 his last words were an exhortation to his heirs to maintain his standards of financial acumen. His funeral was attended by twenty-six men of the name Medici, all paying homage to the self-made capo della casa. By the time Pius II became pope in 1458, Giovanni's son Cosimo de' Medici effectively was the Florentine state. As the Pope himself put it: 'Political questions are settled at his house. The man he chooses holds office ... He it is who decides peace and war and controls

the laws . . . He is King in everything but name.' Foreign rulers were advised to communicate with him personally and not to waste their time by approaching anyone else in Florence. The Florentine historian Francesco Guicciardini observed: 'He had a reputation such as probably no private citizen has ever enjoyed from the fall of Rome to our own day.' One of Botticelli's most popular portraits - of a strikingly handsome young man - was actually intended as a tribute to a dead banker. The face on the medal is that of Cosimo de' Medici, and alongside it is the inscription pater patriae-, 'father of his country'. By the time Lorenzo the Magnificent, Cosimo's grandson, took over the bank in 1 4 6 9 , the erstwhile Sopranos had become the Corleones - and more. And it was all based on banking.

More than anything else, it is Botticelli's Adoration of the Magi that captures the transfiguration of finance that the Medici had achieved. On close inspection, the three wise men are all Medici: the older man washing the feet of the baby Jesus is Cosimo the Elder; below him, slightly to the right, are his two sons Piero (in red) and Giovanni (in white). Also in the picture are Lorenzo (in a pale blue robe) and, clasping his sword, Giuliano. The painting was commissioned by the head of the Bankers' Guild as a tribute to the family. It should perhaps have been called The Adoration  of the Medici.

 Having once been damned, bankers were now close to divinity.