The Birth of Banking (II)

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.

(NB * The term was used for books which recorded income and profits as well as specific agreements or contracts of importance. The other books kept by the Medici were the libro di entrata e uscita (book of income and expenditures) and the libro dei debitori e creditori (book of debtors and creditors)). 

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 1340s. 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.

Detail from a ledger of the Medici bank

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. 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.

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 1469, 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.

to be continued...