Bookshelf: Medici Money and Renaissance Currency Exchange

Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence by Tim Parks is the third financial history book I've read so far this summer, and easily the most historical thus far. A relatively short book at around 250 pages of text, Medici Money chronicles the rise and fall of the famous Medici family and their elaborate banking system in 15th century Florence.

Image from Google Image search.

As Parks explains in the opening pages, "This book is a brief reflection on the Medici of the fifteenth century--their bank; their politics; their marriages, slaves, and mistresses; the conspiracies they survived; the houses they built and the artists they patronized. The attempt throughout will be to suggest how much their story has to tell us about the way we experience the relationship between high culture and credit cards today, how far it informs our continuing suspicions with regard to international finance and its dealings with religion and politics." A sweeping goal, to be sure, but an important one as well--few historians have endeavored to connect the Medici and their banking with modern-day finance.

The book begins with a well-written look at the historical environment of the Medici, focusing on how the metaphysics and morality--or lack thereof--of the Catholic Renaissance era affected the exchange of money. After spending some time investigating the important topic of usury, Parks moves into a broad examination of Renaissance finance, noting how the central financial and religious importance of Rome created a steep economic imbalance in Renaissance Europe. Much of the flow of expensive goods was from the south (Italy) to the north (England, Germany, Belgium), but the return flow of currency back to Italy was often slower and more difficult. The result was a massive financial imbalance within Europe in favor of Italy, while at the same time huge trading deficits in the countries of northern Europe, who were often deep in debt to the local branches of Italian banks.

Despite this complex and inefficient environment, Italian bankers such as the Medici still found plenty of ways to make a profit, mainly from international currency exchange. While the Medici were merchants as well as bankers, and made some money by speculating on and selling various commodities and consumer goods, they amassed most of their wealth through currency exchange. A merchant would come to a Medici bank and asks for 1,000 florins, offering in return an exchange deal in London, where he will be exchanging florins into pounds sterling. In return for the loan, the merchant would write out a cambiale, or bill of exchange, instructing the Medici be paid 1,000 florins at 40 pence to the florin, as is the custom. While the "how" of the repayment has been clearly defined, this last phrase was very important, since it defined the "when," or the length of validity of the bill of exchange. "As is the custom" meant the standard length of the journey from Florence to London, which at the time was 90 days or three months.

Since currency values and exchange rates fluctuated daily then just as they do now, yet modern communication and financial data systems hadn't yet been invented, one may wonder how on earth the Medici were able to consistently profit from international currency exchange. The answer is that, at the time, currencies were always worth more in their country of issues, due to the complex and inefficient exchange market of the time. As a result, the florin was always worth 4 pence more in Florence than it was in London. So returning to the aforementioned transaction: our merchant would take his 1,000 florins and convert them to 40,000 pence in London, three months after departing Florence. He then sought out a local client or fellow merchant who wanted to pay him back in florins--perhaps someone speculating on English wool who thinks it will be worth more in Italy. Thus a second bill of exchange would be written, stating a payment of 40,000 pence at a rate of 36 pence to the florin. If all went well and the bill made it back to Italy in time, the Medici bank then collected 40,000/36, or 1,111 florins, resulting in a profit of 111 florins and an annualized interest rate of 22%. Not a bad rate of return.

Italian Renaissance bill of exchange, 1398. From http://arttattler.com/archivemoneyandbeauty.html.

By making hundreds of these deals, the Medici were able to augment their income from commercial merchant activity and ecclesiastical incomes from church bishops and cardinals. Thus, they built a diversified and global financial base upon which to expand their banking system and, over time, their power and influence within Florence. The downfall of the Medici banking system, and thus their family, came when they began ignoring the fundamentals of finance to spend enormous sums on ensuring political prestige. This led to bankruptcy, liquidity crises, the breakdown of cooperation between their various European bank branches, and, ultimately, the closing of the entire bank and the expulsion of the Medici from Florence. Yet not before the Medici family had been able to create a glorious, if rather brief, "golden age" that forever linked Florence with the pinnacle of Renaissance art, architecture, and culture. And it was all of it--from the sculptures of Donatello to the political theory of Machiavelli--paid for with Medici money. After all, as Cosimo de Medici once said, "The poor man is never able to do good works."