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Genesis of High Finance

The story of the Medici Bank of 14th and 15th century Florence is the story of how one family used finance to control a government. In the priority that the Medicis gave to financial deals can be found the seeds of the forces of global finance that today wield so much influence on the politics and economics of nation states.

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Genesis of High Finance

Case of Medici Bank

The story of the Medici Bank of 14th and 15th century Florence is the story of how one family used finance to control a government. In the priority that the Medicis gave to financial deals can be found the seeds of the forces of global finance that today wield so much influence on the politics and economics of nation states.

D N GHOSH

P
olitics, Renaissance and Banking, the link that immediately comes to mind is that of the legendary Medicis. A phenomenal family, producing not only daring and unconventional money managers, but crafty politicians, avid patrons of art and architecture, two famously important popes and two highly controversial queens of France. From the early 15th century to the early 18th century, the Medicis dominated the Tuscan stage, first within a quasi-democratic system and then through dynastic inheritance. The source of all their great wealth and power was in a bank.

Tim Parks is a novelist of repute. With his fine literary sensibilities, he gives us in Medici Money Banking, Metaphysics and Art in Fifteenth Century Florence a fascinating insight into the character and interests of the dramatis personae of the house of Medici who were associated with the rise and fall of Medici Bank in the 15th century. Parks has drawn primarily from Machiavelli’s Florentine Histories, the various historical accounts of Francesco Guicciardini (both of which were written in the 16th century), Raymond Roover’s voluminous history of the Medici Bank and the scholarly study by J R Hale on the Medici family. He has been careful in not allowing the seductive Medici myth to corrupt the integrity of the facts. His brisk and witty style makes the book a delight to read, vividly evoking the richness of the Florentine renaissance and the glittering circle around the Medicis – replete with artists, popes and kings.

The perspective in which Parks has placed the story makes it topical. It is, as he says, “about the way…it informs our continuing suspicions with regard to international finance and its dealing with religion and politics”. Against the background of the large historical canvas, where the cultural efflorescence of therenaissance and the metaphysical issues of banking receive prime coverage, the economic and political forces that were shaping the bank and the outlook of the Medicis get somewhat buried. For an understanding and clarity of this perspective, it is necessary to disentangle the conjuncture of circumstances, economic and political, within which the Medici bank originated and evolved.

Origin and Evolution

During the 12th and through the 14th centuries, Italian banking reached a high level of institutional development. Florentine merchants had been actively participating in the champagne fairs, servicing an extensive trading network, extending from north-west Europe to the Levant and specialising in the critical functions of currency exchange and money transfer. When Giovanni di Bicci founded the bank in 1393, Florentine polity and economy was in deep turmoil. The great crash of the two leading commercial and banking families of Florence, Bardi and Peruzzi had been triggered by the default in 1339 by Edward III, king of England, on a massive loan amounting to 1.3 million gold florins. Some estimate the obligation to have been larger than the value of all Florentine cloth production in 1338. The default and the resultant collapse of the two banks had jeopardised the lifeline of Florence – business and commerce. The Florentine republic was being buffeted on the one hand by the revolt of the workers whose livelihood was affected by the continued plummeting of cloth production and an intensification of feuds among the different factions of the city’s ruling groups. Added to it were the internecine wars among the ruling princes surrounding Florence. The extent of commercialisation of warfare, continuous readjustment of territorial boundaries and involvement of ruling oligarchies in state politics, provided a fertile field for owners of mobile capital to flourish and rise to prominence. Giovanni realised that the fatal weakness of the oligarchic rule in Florence was the disjunction between political power and wealth. With well considered and farsighted moves, he succeeded in having the two converge within his family.

A solid base for his bank was Giovanni’s first priority. Moving quickly to fill the void left by the two failed banks and a host of lesser financiers, and drawing lessons from their failure, he put in place a rigid system of what we call “risk management” in modern terminology: legal and structural safeguards in the management of branch network that could reasonably ensure that the risk originating in one country does not spread to another. But in the turbulent political ambience of the Italian city states of those days, technical skills and management of risks by themselves would not have taken him far to ensure continued prosperity for the bank and his family. He decided to pay equal attention to management of politics: that turned out to be as critical for the future of the bank as management of money.

He founded the Medici Party, using the bank as the nucleus. The various branches of the family fell in line behind the superior financial weight of Giovanni’s family. By a series of careful marriages, linking the Medici with less wealthy but more prestigious families, he broadened his support still further by acquiring a circle of less influential, but numerous bodies of friends, men who came to identify their interests with those of the Medici in return for their support. It is with the help of this party, backed by the enormous wealth generated by the Medici Bank that the Medici family acquired undisputed power within Florence.

Shift in Strategy

Mixing of commerce and banking was conventional in those days, but with a radical shift in business, about 90 per cent of the bank’s recorded profit started coming from banking. With the tapering off of the wool trade, it was the surplus from financial operations per se that the bank started looking for. By assiduously cultivating successive popes and becoming their bankers, the Medici Bank emerged as the conduit for the largest floating capital of the world. Apart from the volume of cash flows through collection and transmission of tributes to Pope from all Christendom, the chronic indebtedness of the Curia to the house of Medici enabled the family to mobilise the spiritual and organisational power of the church, whenever it was necessary in the financial interest of the bank.

Economic and Political Weekly February 18, 2006

The most profitable foreign branch was Rome, generating more than half of the bank’s revenues. Canonical restrictions on the charging of interest were by that time being virtually ignored. The Medici Bank knew how to manage the appearance of compliance, perfecting the art of recording transactions in a manner that assuaged the conscience of the church. It could not have been otherwise, for bishops, cardinals and popes had the need for custody for their large funds and Florentine banks were good at arranging special service for them. The banks called them “discretionary deposits”, rather similar to the portfolio management services for high net worth individuals in today’s world.

All this had become conventional before Medici Bank came on the scene, and though not central to the core of the book, Parks takes an interesting excursion through the lively debate on usury; the tussle between what he calls the fundamentalists and compromisers of the canonical prohibition.

Apart from the Roman Curia being the source of their strength and power, the Medici family exploited, cautiously but effectively, the competition for mobile capital between France and England during the Hundred Years’ War. Giovanni was on intimate terms with popes and princes, usually acting as hosts to emperors on behalf of the Florentine republic. The foreign policy of Florence was virtually left to him to conduct in the informal atmosphere of the Medici palace. The influence of the family and the bank became so overpowering that it was hard to distinguish between the resident representative of the Medici and the political agents of the Florentine state.

From 1435 to 1450, when the bank was in its heyday, profits aggregated 2,90,791 florins – astonishing profits in the eyes of contemporaries – of which the Medicis took 70 per cent. Remember that a respectable ‘palazzo’ would cost only 1,000 florin to build, and that the vast majority of the population was too poor to pay so much as a single florin in tax. The cash flow was so overwhelming, that the different sections of the populace fell in line with the wishes of the Medicis. Read a quote taken by the author from Machiavelli’s Florentine Histories. Talking of Cosimo who succeeded Giovanni, Machiavelli said, “he helps everyone with his money, and not only private individuals, but the state, and not only Florentines, but the condottieri; he favours this or that citizen who has the need of the magistrates; by the goodwill that he has in the generality of people he pulls this or that friend to higher ranks of honour”.

Finance and Politics

On the foundation laid by his father, Cosimo emerged as “the concealed puppet-master of Florentine politics” (J R Hale, Florence and the Medici: The Pattern of Control , 1977). An aggressive banker he was, but more than that, he was an astute and suave politician, mixing power with grace and covering it over with decency, never making a display of the unconstitutional power that he acquired through the discreet use of money. Whenever he wished to achieve anything, he would give the impression that it was others who had suggested the thing, not he. The “greatest attention must be paid to the technical aspects” as Cosmo declared in one meeting. What would this comment evoke in the mind of a citizen in any democracy? Take this quote from Parks: “Whenever in a democracy, we see our rulers obsessed with ‘the technical aspects of the electoral process’, whenever we see them tinkering with the size of constituencies, or machinery for counting ballots, then we know we are getting close to ‘the secret things of our town’, the gap between respectable appearance and brutal reality.”

The rules Cosimo laid down in his lifetime became the natural order of things. The formation and expansion of Medici’s financial empire had by then become co-terminus with the formation and expansion of the state moulding capabilities of the house of Medici. When Lorenzo became the head of the family after the death of Cosimo in December 1469, some 700 citizens met and agreed that “the reputation and greatness of the Medici family must be preserved”; by which they meant that the secret things of this government will pass through Lorenzo’s hands as through his father’s. What Lorenzo had to say was the following, a statement that history books often quote: “Though I, Lorenzo, was very young, being twenty years of age, the principal men of the city and of the regime came to us in our house to mourn our loss and to encourage me to take charge of the city and the regime as my grandfather and my father had done. The which (sic) being contrary to my age and involving great responsibilities and perils, I accepted with reluctance, and only to preserve our friends and possessions, for in Florence things can go badly for the rich if they don’t run the state” (p 183).

Lorenzo was far too preoccupied with the glamour of art and politics to pay much attention to the affairs of the bank, though it was the source of wealth for the family. The bank lapsed into activities such as financing war and consumption of luxury goods on the part of the debt-ridden aristocracy that his predecessors had scrupulously, albeit diplomatically, avoided. Lorenzo himself became one of the bank’s main debtors who would never repay. However, notwithstanding the inglorious decline and bankruptcy of the bank and the exile of the family from Florence for about three decades from 1494, the family had acquired such prestige that, their less competent successors could recover and legitimise the Medici rule of Florence in the 16th century as dukes of Tuscany, marrying into the families of kings and emperors of Europe, and placing sons and daughters on so many thrones including that of the Holy See.

Genesis of High Finance

Park’s book is a gripping narrative of the golden years of the Medici Bank: the way it was imaginatively deployed by the family as an instrument to influence and control the machinery of the republican government of Florence, the interweaving of charisma and manipulative politics to ensure dynastic succession, business connections with the high and the mighty as the lever to acquire a celebrity status in European politics of the 15th century. But the Medici Bank had significance much wider than its role in projecting the Medici family on the European scene.

Late 14th and 15th century Europe marked the end of the unprecedented commercial expansion of the preceding three centuries and the beginning of a phase of financial expansion. The surplus that the bank was generating accrued mostly from financing activities, profits from trading activities constituting a small portion. Trading in money emerged as the core activity. Giving high priority to financial deals with popes and governments and being selective in the choice of governments with which to do business, Medicis became more and more deeply involved in the business of politics and over time let their commercial activities wither. The financial surplus could have been ploughed back into the expansion of commercial and industrial operations, but the Medicis desisted from such a course. They would have realised that such a course of action would have been risky, involving the family in dubious business transactions, like what had happened to Bardi and Peruzzi, and ruined the prospects that were opening up for them to emerge as one of the wealthiest families of Europe. Why not therefore continue to deal with money per se? Not as a mere “trader in money”, but in financial deals that were woven seamlessly with political bargaining. Many economic historians (Giovanni Arrighi (1994): The Long Twentieth Century, Chapter 2, ‘Rise of Capital’) trace in it the seeds of the later flowering of the autonomous forces of global finance that exercises to day an assertive influence on the polities and economies of nation states.

EPW

Email: dnghosh1@dataone.in

Economic and Political Weekly February 18, 2006

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