The Renaissance Bankers

The table covered in green

In the squares of the Italian merchant cities of the fourteenth and fifteenth centuries, beneath the porticoes or in the open on market days, the money-changer sat behind a long table covered with a cloth, often green, on which lay the account books, the scales for weighing coins and the bags of money. That table was called, in Italian, the banco, and from that humble and concrete word came the name of one of the most powerful institutions in history: the bank. At the banco one changed the coins of Europe’s countless mints — florins, ducats, scudi, groats, pennies of every coinage and alloy — an operation anything but trivial in a world where every city struck its own money and where knowing the real value of each, its metal content, its goodness, was a specialised trade. But at the banco one did much more: deposits were received there, loans granted, accounts between merchants settled, bills of exchange bought and sold. The money-changer was, in embryo, already a banker.

There is another word, born in the same square, that tells the other side of the coin. When a banker failed, when he could no longer meet his commitments and the creditors presented themselves at his table without finding the means to be paid, the banco was, according to tradition, physically broken, smashed, to mark publicly the end of his activity and his ruin. From banco rotto, broken bench, came the word bankruptcy. The two words, bank and bankruptcy, born twins on the same table, already tell everything of the affair this chapter recounts: the bank is a marvellous machine for creating wealth and trust, but it carries inscribed within itself, from its very name, the possibility of its own collapse. The history of the great bankers of the Renaissance is at once the history of this power and of this fragility, and neither is understood without the other.

In this chapter we shall enter the workshops where modern banking was born, follow the rise of the great dynasties of bankers who made and unmade popes and emperors, and try to understand the technical invention that was the silent foundation of it all: double-entry bookkeeping, the new way of keeping accounts that allowed the enterprise to see itself with a clarity impossible before. And we shall meet, once again, the great truth that runs through the book: that money is always more promise than thing, and that the bank does nothing but carry that truth to its consequences, building upon trust an edifice all the higher and, for that very reason, all the more exposed to the wind.

The enterprise that sees itself

Let us begin with the technical invention, because it is the foundation of all the rest, even if it is the least conspicuous. To run a commercial enterprise of any complexity — branches in several cities, partners, debts and credits with dozens of counterparties, goods in transit, different currencies — one must know, at every moment, how things stand: how much one owns, how much one owes, how much one has gained or lost. It seems obvious, but it is not at all, and for most of human history it was an unsolved problem. Accounts kept in a rudimentary way — a list of receipts, a list of outlays — suffice for a simple activity, but become an impenetrable fog when the enterprise grows. How does one know whether a firm with ten branches and a hundred debtors is in profit or in loss? How does one check that a distant agent is not stealing, that an account balances, that the patrimony grows or erodes? The answer the Italian Renaissance gave to this question is one of the most important and most underrated intellectual inventions in history: double-entry bookkeeping.

The idea, in its essence, is of a genial simplicity. Every economic operation is recorded twice, in two distinct accounts: once as “debit” and once as “credit”. If I buy goods paying in cash, the goods enter my assets (one account increases) and the cash leaves (another account decreases): the same operation, seen from two sides. If I receive a loan, the money enters the till but there arises, for an equal amount, a debt. Every economic fact always has two faces — a source and a use, a debit and a credit — and to record both means to grasp the operation in its entirety. The consequence of this method is prodigious: since every entry has its counterpart, at any moment the sum of all the “debits” must equal the sum of all the “credits”. If the accounts do not “balance”, if the two sums do not coincide, there is an error somewhere, and the system itself flags it. Double-entry is not only a way of noting down: it is a mechanism of automatic control, a logical machine that verifies its own coherence.

But the greatest gift of double-entry was another, and it touches something deeper than mere exactness. By keeping accounts in this way, the enterprise becomes for the first time visible to itself. At any moment the merchant can, by closing the accounts, know exactly how much his firm is worth, how much he has gained in a period, where he has made profits and where losses. The enterprise ceases to be a nebula of scattered dealings and becomes a unitary object, measurable, legible at a glance in the balance sheet. It is a cognitive revolution before it is a technical one: double-entry gives the merchant a mirror in which his activity is reflected whole, and allows him to govern it with the coldness of calculation instead of with intuition and memory. It has been said, with an effective formula, that double-entry taught the enterprise to think of itself as an abstract entity, separate from the person of the owner, endowed with its own patrimony and its own accounting destiny. In this abstraction lies the germ of the modern firm, of the joint-stock company, of all the capitalism to come.

Here a clarification is necessary, one that historical accuracy imposes and that does honour to the truth. Double-entry was not “invented” by a single man at a single moment: it formed gradually in the practices of the Italian merchants between the thirteenth and fourteenth centuries, refined from shop to shop, from city to city, without an author and without a birth date. What happened in 1494 was something different but also decisive: in that year a Franciscan friar, a mathematician, named Luca Pacioli, published a great treatise of mathematics, the Summa de arithmetica, which contained a section devoted to keeping accounts “in the Venetian way”, that is by double-entry. Pacioli did not invent the method: he described it, systematised it, set it down in writing clearly and in order, and thanks to printing — born a few decades earlier — he spread it throughout Europe. He was, if you will, not the inventor but the great populariser of double-entry, the one who turned it from a craft practice handed down orally into codified and teachable knowledge. The distinction matters, because it reminds us that great economic inventions rarely have a single father: they are born of the anonymous work of many, and owe their triumph not to the flash of genius but to slow sedimentation and to diffusion [Goetzmann 2016].

It is worth dwelling on the role of printing, because it illuminates how a technique turns into shared knowledge. Double-entry had existed for two centuries as practical knowledge, jealously guarded in the workshops, transmitted from master to apprentice, often in the form of a professional secret. So long as it remained such, it was the patrimony of a few. What printing did, through Pacioli’s treatise, was to wrest it from that oral and craft transmission and make it a public knowledge, codified, accessible to anyone who could read and procure a book. A merchant of Lyon, of Antwerp, of Nuremberg could now learn the Venetian method without ever having set foot in an Italian workshop, simply by studying a printed volume. Double-entry bookkeeping thus became, within a few decades, the common language of European business, and was one of the first great examples of how printing — the technology that was revolutionising the transmission of knowledge — could spread not only religious or literary ideas, but also economic techniques, accelerating the development of commerce and finance. It is no accident that the birth of modern capitalism coincides with the age in which printing made universally available the intellectual instruments — accounting, commercial mathematics, the tables of exchange and interest — that capitalism needed in order to function.

The Medici bank

If double-entry was the instrument, it was the great merchant banks that made of it an empire, and among them all the most famous was that of the Medici of Florence. The Medici family, of non-aristocratic origins, built its fortune on the bank founded toward the end of the fourteenth century, and in the course of the fifteenth made of it one of the financial powers of Europe, to the point of becoming, with money, also de facto lords of Florence and then protagonists of the politics and culture of the Renaissance. It is worth understanding how that bank was organised, because its structure reveals the new way in which trust was created and governed.

The Medici bank was not a single, centralised firm, but a network of branches scattered in the great cities of European commerce — Florence, Rome, Venice, Bruges, London, Lyon, and others — each of which was, from a legal point of view, a partly autonomous company, with its own partners and its own capital, tied to the others by cross-holdings and by the family’s control. This structure, closely recalling that of a modern company organised by branches, had a fundamental advantage: it limited risk. If a branch failed, the damage could, at least in principle, be circumscribed, without dragging the whole group down with it. It was an embryonic form of that separation of liabilities which is one of the pillars of modern capitalism. The branches communicated with one another through a continuous flow of letters — commercial letters, bills of exchange, statements of account — that crossed Europe with the couriers, and on that correspondence the whole edifice rested: the Medici network was, first of all, a network of information and trust, held together by written paper more than by gold.

What did this bank do? It did many things at once, and it is important to understand this because the Renaissance banker was not a specialist of a single activity, but an all-round operator in money. He traded on his own account, in precious goods such as wool, silk, alum — a mineral precious for dyeing cloth, on whose trade the Medici had at one point something like a monopoly. He changed currencies and dealt in bills of exchange, lending in effect at interest through the fictions of exchange we described in the previous chapter. He received deposits from those who wished to put their money safe or make it bear fruit. And he granted loans, above all — and here is the delicate point — to the powerful: to princes, to cardinals, to sovereigns, and first of all to the most important and remunerative of clients, the papacy.

The banker of God

The relationship between the Medici bank and the Church of Rome was the heart of their fortune, and it illustrates perfectly how, in the Renaissance, money and power were inextricably intertwined. The Church was, in the world of that time, the vastest and most ramified organisation in Europe, the only truly supranational institution, with revenues flowing to Rome from every corner of Christendom: tithes, tributes, taxes of every kind paid by the faithful and the clergy of the whole continent. To make that river of money flow to Rome, coming from distant countries and in different currencies, was a colossal financial problem, and it was exactly the kind of problem a bank with branches all over Europe could solve. The Medici became the bankers of the papacy: they collected on behalf of the Church the ecclesiastical revenues in the various regions, transferred them to Rome through the mechanism of bills of exchange without physically moving the metal, and from this function drew immense profits, as well as a prestige and a closeness to power worth as much as the money.

But the relationship with the powerful, and with sovereigns in particular, had a dangerous side, and it is a lesson that recurs throughout the history of finance. To lend to a king or a prince is, in appearance, the safest and most lucrative business: the sovereign needs enormous sums, above all for war, and is willing to pay well, and to grant one’s credit to a king gives the banker an invaluable power and prestige. But the sovereign is also the most dangerous debtor that exists, for a simple reason: he has force on his side. If a merchant does not pay, he can be sued, condemned, compelled. But if a king does not pay, who compels him? To whom does one turn against the sovereign, who is the very source of law and of force? The king can always, when the debt weighs too heavily on him, simply refuse to pay — repudiate the debt, as it is said — and the creditor banker has no remedy, because there exists no authority superior to the king to which to appeal. We have already seen this dynamic at work in the previous chapter, with the Templars destroyed by their royal debtor; we shall meet it here, and further on still, because it is one of the constants of the relationship between finance and political power. The banker who lends to kings walks a tightrope: so long as the sovereign will and can pay, the business is splendid; but the day he will not or cannot, the creditor discovers that he has no hold over him.

The price of this danger could be read in the rates. Loans to sovereigns, precisely because risky, carried interest far heavier than those granted to a reliable merchant: the banker made the risk of repudiation be paid for with a high recompense, and the great loans to the crowns of Europe, in the Renaissance and the following centuries, bore rates that reflected the reputation for unreliability of their illustrious debtors. The history of interest rates, which is also a history of trust, shows this connection clearly: the more a debtor was held inclined not to pay, the higher the price he had to offer to obtain credit, and sovereigns, powerful but faithless debtors, often paid dear [Homer & Sylla 2005]. It was an apparent compensation, however, because no rate, however high, repays the total loss of the capital when the king simply refuses to pay: and the banker who let himself be seduced by the lavish interest offered by a sovereign discovered, too late, that he had exchanged an illusory gain for a mortal risk.

The Medici had, moreover, before their eyes a recent and admonitory precedent, occurred in their own Florence. A couple of generations before their rise, two of the greatest Florentine merchant and banking companies of the fourteenth century, those of the Bardi and the Peruzzi, had lent colossal sums to the king of England to finance his wars against France, at the beginning of what would be the Hundred Years’ War. When the king, weighed down by the costs of the conflict, repudiated his debts and refused to pay, the two companies, which had concentrated on that single royal debtor an enormous part of their resources, were dragged into failure, in a collapse that shook the whole Florentine economy. It had happened in the mid-fourteenth century, and it was a disaster of such proportions as to remain impressed in the city’s memory. And yet, and this is the instructive thing, the warning was not enough: the Medici, though knowing perfectly well the fate of the Bardi and the Peruzzi, repeated in their own way the same error, letting themselves be exposed to sovereign debtors who would in turn harm them. The temptation of lending to the powerful was, evidently, stronger than the lesson of history — as it would be, century after century, down to our own day.

The Medici bank learned this lesson at its own expense. Its London branch, in particular, was ruined by the loans granted to the English crown during the dynastic wars of the fifteenth century: large sums lent to sovereigns who then did not repay, or repaid only in part, and that dragged the branch to insolvency. And here something must be said that corrects the gilded image one often has of the Medici. The fortune of the bank was not an uninterrupted triumphal march: it knew failures, grave losses, branches that went bankrupt, a management that in the last part of the fifteenth century became less rigorous and more imprudent, with politically motivated but economically reckless loans. The Medici bank, which had been for decades a formidable machine, declined and headed toward ruin precisely as the family reached the apex of its political and cultural glory: the Medici became lords of Florence and supreme patrons of the Renaissance while their bank, the original source of their power, weakened and finally dissolved. It is an instructive fate, and it warns us against the myth of the infallible mercantile genius: even the greatest bankers in history committed ruinous errors, and precisely the interweaving of money and power that had made them great contributed to their fall [Ferguson 2008].

Money made beauty

There is an aspect of the Medici affair that cannot be passed over, because it illuminates a function of money different from all those seen so far, and because it is what that family is still universally remembered for today. The Medici did not use their immense wealth only to accumulate more wealth or to exercise political power: they used it also to finance art, architecture, culture, in a measure and with a taste that have few parallels in history. They were the patrons of some of the greatest artists of the Renaissance; they commissioned palaces, churches, sculptures, paintings; they gathered libraries, supported scholars, made of Florence a capital of beauty and thought. The money earned at the bank, by changing currencies and lending to popes, was transformed into domes, frescoes, statues, manuscripts — into a considerable part of what we still call the Renaissance.

This transformation of money into beauty was not only generosity or disinterested love of art, though these too had their part in it. It was also, and lucidly, an instrument of power and of legitimation. A family of non-noble origins, which had built its power on money — an activity still surrounded, as we have seen, by a shadow of moral suspicion — needed to ennoble itself, to transform wealth into prestige, into recognised authority, into something that money alone does not confer. Patronage served exactly this: to convert economic capital into symbolic capital, to make the mercantile origin of the fortune be forgotten beneath the splendour of the works, to bind the family’s name not to loans and exchanges but to the eternal magnificence of art. It was, if you will, a most refined form of that same impulse we had seen in the merchants who left sums to works of charity to redeem the shadow of usury: the need to reconcile money with something higher, to redeem it by transforming it into a visible and lasting good. The difference is that the Medici did it on a scale and with a taste such as to generate a patrimony of beauty that has survived their bank by centuries, and that today is worth, in a sense no balance sheet could record, infinitely more than all the gold they lent and lost. It is one of the most eloquent lessons on the nature of money: that it is a means, and that its ultimate value depends on what one transforms it into.

The banker who made emperors

If the Medici were the bankers of the pope, the Fugger of Augsburg were the bankers of the emperor, and their story carries the theme of the interweaving of money and power to its extreme consequences. Descended from a family of weavers, the Fugger built in the course of the fifteenth and sixteenth centuries a fortune that perhaps surpassed that of the Medici themselves, founded on commerce, on finance and above all on the control of mines — of copper and silver — in central Europe. The most famous of them, Jakob Fugger, called “the Rich”, was probably the wealthiest man of his time, and his name is tied to one of the episodes that best show to what degree money could buy the supreme power.

In 1519 the emperor of the Holy Roman Empire died, and the race for the succession opened. The imperial crown was not hereditary: it was conferred by a restricted college of prince-electors, and the candidate who wished to obtain it had, in effect, to buy their votes, with gifts and promises of enormous sums. Two great pretenders faced each other, the king of France and the young king of Spain, Charles of Habsburg, and it was a contest of who would offer more to the electors. Charles won, and became the emperor Charles V, lord of a dominion on which, it was said, the sun never set. But he won because he could offer more money than his rival, and that money was lent to him, for the most part, by Jakob Fugger. It was the gold of the Fugger that bought the votes that made Charles emperor: without that loan, the history of Europe would have been different. It is hard to imagine a barer demonstration of the power of finance: a private banker, with his own money, determined the outcome of the election to the highest dignity of Christendom. It is said that, some years later, feeling himself treated with insufficient regard, Fugger reminded the emperor, in a letter, that without him he would never have girt the imperial crown: and whether or not the letter is authentic in the terms in which it has come down to us, it captures a precise historical truth, the debt of gratitude — and of money — that bound the most powerful sovereign in Europe to his banker [Davies 2002].

But the Fugger too, like the Medici, discovered the reverse of lending to sovereigns. They had tied their fortune to the house of Habsburg, and when the Habsburgs, burdened by the expenses of continual wars, proved unreliable debtors — delaying payments, restructuring debts, and on several occasions, in the course of the sixteenth century, declaring in effect the bankruptcy of the Spanish crown — the Fugger were swept away by it. To have as one’s sole great debtor the most powerful sovereign in Europe proved not a guarantee but a sentence, because when that sovereign did not pay there was nothing to be done. The parabola of the Fugger repeats, on a still greater scale, that of the Medici: the vertiginous ascent thanks to credit to the powerful, and then the ruin caused precisely by those powerful who did not honour their debts. Twice, with two different dynasties, history teaches the same lesson, and it will teach it again.

How the bank creates money

Behind the affairs of the Medici and the Fugger there hides a mechanism that is the secret heart of banking activity, and that we must now bring to light because it is one of the most important ideas in the whole book: the bank does not merely keep and lend existing money; in a certain sense, it creates it. The statement sounds paradoxical, but its logic is clear, and once understood it illuminates the whole history that follows, down to the central banks and the money of today.

Let us imagine a banker at whose bench many deposit their money, to keep it safe or for convenience. The banker soon notices something: the depositors never all come together to withdraw their money. In normal conditions, on a given day, only a small part of them present themselves to withdraw, and at the same time others deposit. A great mass of deposited money lies therefore, at every moment, unused in the bank’s coffers. The banker has an idea, as simple as it is revolutionary: why keep all that money idle, if only a fraction serves for the daily withdrawals? He can lend a part of it, keeping only a reserve sufficient to meet the normal requests for repayment. By so doing, he puts to work money that would otherwise lie idle, and draws an interest from it. This practice — to lend a part of the deposits while keeping only a fractional reserve — is the foundation of all modern banking, and we shall speak of it at length in the chapter devoted to central banks. But already here we must grasp its vertiginous consequence.

When the banker lends a part of the deposits, something strange happens. The original depositor continues to regard as his the money he has deposited: for him, that money is still fully available, it is his wealth, accounted to his credit. But that same sum, lent by the banker to a third party, is now also in the hands of whoever received it on loan, who spends it, makes it circulate, uses it as money. The same money, so to speak, exists twice: as a deposit at the depositor’s disposal and as a loan in the borrower’s hands. The bank, by lending what was deposited with it, has multiplied the quantity of money in circulation without a single additional coin having been struck. It has created money out of nothing — or rather, out of credit, which is the same thing. It is exactly the phenomenon that gives this book its title, and that here we see at work in its purest form: value generated not by extracting metal from a mine, but by writing a number in a register, opening a credit, transforming a deposit into a loan.

This is the magic, and at once the danger, of the bank. The magic, because to create credit means to make capital available for enterprises, commerce, ventures, feeding a prosperity that metal money alone could not sustain: much of the economic growth of the modern age was made possible precisely by this capacity of the bank to multiply credit. The danger, because the whole edifice rests on a fragile premise: that the depositors do not all come together to withdraw their money. So long as trust holds, the system works and prospers. But if for some reason trust wavers, if the fear spreads that the bank is unable to return the deposits, then the depositors all run together to withdraw — it is the “run on the bank” — and no bank, however solid, can withstand a simultaneous demand for repayment of all its deposits, because that money, for the most part, is not in its coffers: it has been lent, it is out in the world. The bank that has lent the deposits is, at every moment, technically incapable of returning them all together, and lives suspended on the trust that no one will ask it to. It is the same fragility that the word “bankruptcy”, born on the same table as the word “bank”, carries inscribed from its origin.

Leverage and the wind

It is well to give a name to the general principle that governs all this affair, because it is one of the most important concepts in finance and will accompany us down to the crises of our own time: leverage. A financial activity is said to operate “with leverage” when it controls or employs resources much greater than its own capital, borrowing the difference. The bank is, by its nature, a leveraged enterprise: with a relatively small own capital, and a limited reserve, it moves and lends a much greater mass of money, made up of others’ deposits. The same holds for the merchant-banker who, with his own capital, controls business of far higher value thanks to credit. Leverage is what multiplies gains: if I operate with money ten times my capital and draw a profit from it, that profit, relative to my capital, is enormous. For this reason finance loves leverage: it amplifies returns, and allows immense fortunes to be built from modest bases.

But leverage is a double-edged blade, and it amplifies losses in exactly the same way. If things go badly, if the debtors do not pay or the business fails, the losses fall entirely on the own capital, which is small, and annihilate it in an instant. A heavily indebted enterprise can be swept away by a loss that an enterprise without debt would absorb without harm: because the leverage that in good times multiplies profits, in bad times multiplies losses until it overwhelms whoever has had recourse to it. The Medici and the Fugger were, in this sense, highly indebted and strongly exposed enterprises: they had built grandiose edifices on relatively slender bases of own capital, and when the wind turned — when the sovereigns did not pay, when the losses accumulated — those edifices collapsed with the same rapidity with which they had risen. Leverage is the wind that swells the sails of finance and drives it to speeds otherwise impossible; but it is also the wind that, changing direction, can capsize the ship.

Precisely to stem this instability, alongside the private banks of the merchants there began to rise, between the Renaissance and the modern age, institutions of a different nature: the public banks, created or guaranteed by the city authorities to offer a safe place to keep and transfer money. In Genoa, the Banco di San Giorgio managed for centuries the debt of the republic and administered its finances with a solidity that made it a power in its own right; in Venice, and then later in Amsterdam and Hamburg, there arose public banks of deposit and transfer, at which merchants could settle their accounts by transferring credits from one name to another in the bank’s registers, without handling coin. These public banks, more prudent and more guaranteed than the private banks, were an important step toward the stability of the system, and in a certain sense the ancestors of the central banks we shall meet a few chapters on: because they began to separate the function of safe custody of money and regulation of payments from that, riskier, of leveraged lending. But the underlying tension never disappeared, and it will re-emerge, identical, in every season of financial history.

In this tension between power and fragility — between the capacity to create wealth by multiplying credit and the risk of being overwhelmed by it — lies the essence of banking activity, from the green-cloth-covered bench of the Italian squares to the gigantic financial institutions of our own time. The bank is one of the most powerful inventions humanity has conceived: without it, without its capacity to gather scattered savings and transform them into credit for those who know how to make it bear fruit, the prosperity of the modern world would be inconceivable. But it is also one of the most unstable, because it builds on the void of trust, lending what it ought to keep and promising everyone an availability it could never honour all at once. The great bankers of the Renaissance were the first to handle this power on a vast scale, and they were the first to be, in turn, exalted and destroyed by it. After them, the history of money is in large part the history of how this marvellous and dangerous machine — the bank, leverage, credit that creates money — was progressively perfected, extended, and finally placed under the tutelage of a new institution, born precisely to prevent its ruinous collapses: the central bank. But before we get there, we must follow money on another great voyage, the one that, across the oceans, would pour onto Europe the precious metal of a whole new world, and with it a revolution of prices never before seen. That is the story of the next chapter.