The Medici Bank

Updated: Sep 8

The Medici bank was one of the major foundations for how capitalism based on

private ownership is seen today. These Italian bankers were the key to the

growth of banking during the late 14th and early 15th centuries and grew a

dynasty and legacy that would live on for much longer. In the following article, I

will explain who these Italian bankers are, how they became so powerful, and

what role they’ve played in modern-day capitalistic societies.


Banking is a major instrument in politics and governing today, and that was not

different back in the 14th century. This period was known for the rapid growth of

medieval banking due to the commercial revolution across Europe. The

commercial revolution was the rapid growth and expansion in the availability of

trade across Europe which has shaped the world it is today. With merchants

travelling across Europe in order to buy and sell goods for a profit, there needed

to be a medium that could help manage the many different currencies across the

Continent.


As anyone with any kind of financial education will tell you, a return on

investment is necessary for the modern-day banking system to work. Most

commonly seen in the form of interest on loans but during the period of Medieval

banking, the church deemed usury as a sin that will take you straight to hell.

Thankfully for these Medieval bankers, the Catholics allowed you to pay away

your sins in the form of donations to the church. You may be asking why this is

all relevant, but it is important to understand the culture and social norms during

this period.


The Medici bank was founded by Giovanni di Bicci de’ Medici. After working for

his uncle had decided to retire from banking in Rome, Giovanni took over one of

the Rome branches and bought out his uncle when he retired. In 1397, the

Medici bank properly began after Giovanni relocated the main bank from Rome

back to Florence. This was due to the sheer size of its populous and managed to

rebound economically after the black death. Another massive benefit was the

networking that Florentines had. There were Florentine communities across

Western Europe. Giovanni used these connections as did every other Florentine

business to boost their competitive edge.


Giovanni began this Florence branch in a joint venture with another man called Benedetto de’ Bardi. Bardi remained the manager of the Rome branch while Giovanni remained in Florence. Once these branches were open, Giovanni and Bardi began their expansion of branches into Venice which was one of the key gateways into the Mediterranean, a more northern point for trading with Europe and for the Spice trade. This came into fruition in 1402 and remained the core structure of the business until 1429 when Giovanni passed away. The Medici bank had also managed to use third-party intermediaries which meant that the bank also had dealing across Europe in key locations such as Brugge and London during Giovanni’s era


In 1420, Giovanni retired and handed over the reins to his sons, Cosimo and Lorenzo. Since the beginning of the bank to his retirement, the bank had amounted over 150,000 florins. However, the peak of the banking activity and influence of the Medici bank had not yet reached its peak. When the sons took over the bank, the Rome branch was the most profitable since a majority of its dealing were with the Pope’s finances.


Cosimo’s reign over the Medici bank began after Giovanni’s death but he properly began his era in 1394 after returning to Florence after fleeing to Venice the year before. This is when the bank began expanding exponentially and opening branches across Europe in strategic locations to incorporate themselves into huge markets. The wool trade in London, Florence’s port in Pisa, and the former papal catholic residency in Avignon. This allowed the Medici bank to help diversify their income and investments which we know helps lower the level of risk of the business. Most of the profits generated during Cosimo’s era derived from these markets that were targeted from the expansion by acting as middlemen to different parties. Essentially tied in with merchant banking.


The next step for them was to spread their influence and grasp on the political landscape across Europe. Doing so by imbursing Francesco Sforza’s bid to become the Duke of Milan and offering to fund the King of England. This would allow them to be given contracts to run operations like collecting the tolls or being allowed to access operations that they wouldn’t have had access to otherwise. However, the problem arose of having all the different currencies which prices were not static and to minimize the risk of carrying money from the bank to purchase the goods, then transporting the goods to a new customer and receive a different currency and bring the profits back to Florence in florins. This led to the mass adoption of the bill of exchange during this period.


The bank would issue a bill of exchange on goods, allowing the transactions to flow more efficiently as physical cash was no longer a necessity. The Medici bank used the bill of exchange to help handle the massive volume of transactions. This is how the bank managed to get around the sinful act of issuing usury too since the bill of exchange time difference from when the money eventually comes in from the deal was somewhat speculative and that was “okay” with the church. This is how the bank became so prosperous.


With expensive loans to Edward IV and the Duke of Milan to try and maintain a power grasp led to financial decisions based on emotion and not empirical statistics. This meant that they misinterpreted the amount of risk they were undertaking since they had been doing well for so long. In economics, this is could be defined as the winner’s curse. The King of England and Duke of Milan defaulted on the loans that the Medici bank had lent to them, leading to the decline in power and strength of the bank as a whole.


Looking back at the operations of the Medici bank, we can compare the structure of the bank similarly to how we see modern-day holding companies. This was a rare practice during their time, and you could argue that the Medici’s popularized it. All the branches had their own accounts for the branch, but the Florence branch was the main headquarters. While the Florence branch had its own accounts to manage, it also had the master account of the whole bank. This is another accounting and business method that is still commonly used today with companies like Tesco with their other businesses, Jacks and formerly HelloFresh, that are purely owned by Tesco. Operations like this can be beneficial as we know from economics as the Medici bank was able to operate with economies of scale. Another major accounting method that the Medici bank managed to influence mass adoption is double-entry bookkeeping.


In my opinion, the Medici bank was a huge influence on the modern-day capitalistic outlook on banking. Using the innovative accounting methods back in the 14th and 15th centuries proved to be so successful that we still use the same methods to this day to be able to do accounts for businesses. They drew the blueprint for modern businesses and enterprises to build and grow. Arguably, you could claim that the Medici bank could also be used as an example of what not to do when in power. How hubris could lead to incompetency to the point of damaging the business.


 

Edited & Reviewed by Tanish Bagga


 

References/ Further Reading

https://www.forbes.com/2008/10/30/medici-banks-meltdown-oped-cx_ms_1031simonetta.html?sh=38af882e129a

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