Islamic banking provides the current focus for investment bankers devising ways to satisfy religious precepts in finance, but in its modern form this dates back only to the 1970s. In Italy and beyond, though, bankers were looking for ways to sidestep religious strictures on charging interest from the early Middle Ages on. That's just one of the lessons to emerge from Tim Parks's fascinating new book on the Medicis, in which the author consistently shows that the past is by no means "another country".*
In medieval Europe it was the Catholic Church that drew up the moral template for society, and its rules extended into all walks of life, including banking. Usury is now taken to be the lending of money at an exorbitant rate; then it was any lending that charged interest.
Saint Luke wrote: "Give, without hoping to make gain." Still, it's not immediately clear why usury acquired the stigma it did. According to Dante, the third ditch of the seventh circle of hell is reserved for sodomites, blasphemers – and usurers. Merchants who thought little of taking child slaves as bed partners, or clipping gold coinage to make a turn, grew cold at the prospect of being branded a usurer as death approached. Parks argues that one explanation for the Church throwing so much moral ammunition at usury lies in the impact of an efficient lending system for society as a whole.
Late-medieval Italian society was in a tremendous state of flux: families rose fast, and fell faster; cities' fortunes waxed and waned. "In our change-loving Italy," wrote the future Pope Pius II, "where nothing stands firm, and where no ancient dynasty exists, a servant can easily become a king."
That might seem a good thing to the modern mind, but many contemporary observers found it easy to make a connection between a fluid class system and the murder and mayhem that ravaged the peninsula of Italy.
And nothing greased that chaos more than money. Borrowing allowed the talented but poor merchant to rise and don the red cloth of the nobility. It allowed a count to wage war on his neighbours. For those concerned with maintaining the social order, ultimately the Church, credit was a dangerous lubricant.
Here's the irony: trade certainly required cross-border financing but by far the single biggest mover of money across the continent was the Church itself, as tribute was sucked in by Rome. In most of Europe it was dangerous and time-consuming to travel with gold or coins. Hence, bills of exchange that could be granted in one city and drawn on in another.
But how could one make a religiously acceptable margin? The Medicis and other bankers solved this riddle by posting differing exchange rates in different cities, a process theologians (mostly) dubbed non-usurious.
Loans were more difficult. Here, the Medicis employed tricks that are easily recognizable 700 years later. Buying another bill of exchange when the first one fell due, the customer effectively received a longer-dated loan disguised as a currency transaction. On the other side of the balance sheet from these 'dry exchanges' were 'discretionary accounts', deposits upon which the customer received a margin in the form of a gift when they got their money back.
Pioneering defaulter
The Medicis, of course, weren't the first family to employ tricks to sidestep the laws of usury. The Bardi and Peruzzi banks had built up fortunes a century-and-a-half earlier, only to fall victim to an early sovereign default when Edward III of England refused to pay his debts.
The Medicis devised a primitive risk control system based on lending limits: 300 florins for cardinals, 200 for courtiers and none at all for Roman merchants, feudal barons or Germans. The key Medici innovation, however, was a system of interlocking holding companies that allowed them to control branches with limited capital. (A similar system allowed veteran Mediobanca head Enrico Cuccia to exert effective control over much of post-World War II Italian business life.)
Parks constantly looks to make such connections across the centuries. Thus condottieri – wandering mercenaries who sold their services to the highest bidder – are seen as the forerunners of the highly paid, and increasingly mobile, footballers of Serie A.
Other comparisons spring to mind. The city states of early Renaissance Italy found it impossible to devise a tax system that captured a large enough slice of local wealth, repeatedly resorting to debasing the currency, or outright default. Then as now in Italy, it was largely the poor and the honest who paid taxes. Since 1945, the hollowing out of the country's tax base has mixed with slapdash spending to force the state into ruinous borrowing at usurious rates. Those self-same tax avoiders were, of course, happy to lend at the highest interest rates in Europe. Ecco! The Italian domestic bond market.
Parks's book ventures well beyond financial systems, dealing at length with the relationship between money, art and power. But it is the constant reminders of the historical creativity and adaptability of finance that is likely to appeal most to the Euromoney reader.
*Tim Parks, Banking, Metaphysics, and Art in Fifteenth-Century Florence, (London, 1975: Profile Business, £15.99, ISBN: 1861977913)
Mark Johnson is the editorial director of Euromoney's conference division