by Tim Parks
What day? Well, how long does it take to get from Florence to London? How long is a piece of string? It depends how you travel. Overland or galley, in haste or at leisure. The English Channel can be rough, never mind the Bay of Biscay. Fortunately, the Exchangers’ Guild has laid down what is the maximum time that a whole range of journeys from one financial center to another can require. Florence to Bruges, sixty days. Florence to Venice, ten days. Florence to Avignon, thirty days. Florence to Barcelona, sixty days. The time to London is ninety days, or three months. That is what the bill means when it says, “as is the custom.” It is referring, very discreetly, to the time between the payment in florins and the repayment in sterling. If our man has taken his florins on June 15, the custom is that the pounds should be ours on September 13. We could agree on an earlier day if we wanted. But we can’t postpone it, because in that case the whole thing would begin to look rather like a loan and not an exchange deal at all.
In the early days, the Medici bank didn’t have a branch in London, but they had trusted correspondents there. Often the bank’s allies abroad were neighbors, perhaps rivals at home. It is easier to feel solidarity abroad. Copies of the bill of exchange are made and the original is sent to Totto Machiavelli and Ubertino de’ Bardi and company in London. The names are always familiar. The banks run their own courier system. The day comes. In return for a small commission, our correspondent sends a clerk to our client’s agent, who, again in return for a commission, pays out the pounds and pennies. The exchange deal has taken place. How can anybody object?
But where is the return for us, the bank? The bank—this is the official position of all those involved—speculates on the shifting exchange rate in the hope that when it gets its pounds changed back into florins, they will be worth more than the 1,000 florins originally lent. But a child could see that in that case, the bank would always be hesitant to accept a deal. There would be periods when the florin was rising and no one would give you the money because it would doubtless be worth less when it came back in pounds. “Pro e danno di cambio,” reads the entry in the Medici bank’s accounts. Profit and loss from exchanges. Out of sixty-seven exchanges for which we have records among London, Bruges, and Venice, only one resulted in a loss for the banker, while the remaining sixty-six saw him making gains that range between 7.7 and 28.8 percent. How?
The exchange rates are fixed daily, Sundays and holidays excluded, by paid bill brokers meeting together with merchants and bankers in the open street. In rainy Lombard Street in London. On the breezy Rialto in Venice. They don’t meet in anyone’s premises, since that would be an acknowledgment of that person’s supremacy. They consider trends in trade. They are aware of currencies whose coins are subject to a little trimming. Any member of the Exchangers’ Guild caught trimming his coins is liable to immediate expulsion! And the same goes for anyone passing on trimmed coins. Directly upon minting, the florin is sealed in leather bags, the so-called fiorino di suggello, or sealed florin. This to avoid trimming. But everybody knows that some people open the bags, replace the coins or trim them down, then reseal them. The florin is under observation. It is losing value against the Venetian ducat, and the Roman florin, not to mention Geneva’s golden mark. These experts know which mints are reducing or increasing the gold content, which currencies are silver based and which gold. Milan’s silver imperial just goes down and down. They know which governments are trying to intervene in the market, which way the speculators are moving. They get together daily and fix the rates as honestly as they can. Why, then, is the florin always worth about 4 pence more in Florence than it is in London?
Keep your eye on the ball. Our customer takes his 1,000 florins in Florence, where the florin is declared to be worth 40 English pence. The bill of exchange is written out at that rate. He instructs his agent in London to pay out in three months’ time. He does so. Our correspondent collects 40,000 pence (or £166 1s. 6d.). We, the bank, then instruct the correspondent to look for—and let us assume he finds—a local client, in London, wishing for a loan of the same amount and offering to pay it back in florins in, of course, three months’ time, the time it takes (officially!) to go from London to Florence. Perhaps he is a merchant buying a consignment of wool, speculating that when it arrives in Italy he can sell it for far more than what he paid for it in the Cotswolds.
So another bill of exchange is written out. But, even disregarding temporal fluctuations, the exchange rate is different in London. Here the pound is worth more. Here it will only take 36 pence to buy a florin. So the bill is written out at that exchange rate: Pay as is the custom £166 1s. 6d. (40,000 pence) in florins at a rate of 36 pence to the florin. And three months later, if all goes according to plan, we collect 40,000/36 = 1,111 florins. In six months we, the original lending bank, have made 11 percent, which is to say, an annual interest rate of 22 percent.
The Medici made hundreds of these deals. Basically, the trick is that the currency quoted as a unit is always worth a small percentage more in the country of issue. As far as Florence and northern Europe are concerned, the difference in the two exchange rates, which determines the banker’s profit, tends to be greatest in early spring, just before the Florentine galleys set out from Pisa for their long trip to Bruges. Because this is when demand for credit to finance trade is highest. It then narrows in the summertime. Manuals are written to help merchants and bankers get their minds around the system. Who needs interest rates?
But was it usury or wasn’t it? The theologians pondered. The bankers consulted them. No one wants to go to hell. Was it a loan with an interest rate, or was it an exchange deal? Remember, if currency rates changed drastically during the period of the transaction, then even the institutional difference between currency rates in different countries would not be enough to save the banker from a loss, or at least a very low profit. Conversely, the borrower could find himself paying a very high price for his loan if rates went further against him than they already were—if the pound, for example, rose vertiginously while those galleys were fighting their way up the Portuguese coast. As long as the geographical distance was maintained, the theologians decided, as long as there was a real exchange of currencies, as long as there was an element of risk, it wasn’t usury.
But to retain their credibility, the doctors of divinity cried a very loud foul at the so-called cambio secco, or dry exchange. In this kind of deal, when the bill of exchange became due in the foreign currency—say, sterling—the client did not pay up, but, after consulting the going currency rate, bought another bill for the exact amount owed. It is as if the first and second customers of the legitimate exchange described above, the man borrowing florins and the man borrowing pounds, were in fact the same person. This second bill then became due in the place where the first bill was issued—say, Florence—in florins, after the required period and at the new exchange rate. In this way, the period of the loan was doubled while the parties involved avoided actually using a foreign currency at all, although the element of speculation on rates, and hence of risk, was still there, since the exchange rates in London on the day in question were observed and a bill of exchange was written up. Hence, to be perfectly logical, there was no reason to say that this was any more or less usury than the regular bill of exchange. All the same, it was vigorously condemned by theologians because now it had become obvious that what the client really wanted was a loan, and not an exchange deal. Motivation is important. In 1429 the government of Florence banned the practice. It was clearly no more than a scam for usury. “To trade in licit exchanges.” Such was the declared purpose of the Medici bank. Yet it frequently dealt in “dry exchanges.” In 1435, when Cosimo took a dominant position in Florentine politics, the law forbidding such exchanges was swiftly revoked.
THIS THEN WAS the state of play: Usury was abominable but people needed loans and bankers a return for giving them. The complex system of differing exchange rates, possible only because of the time it took to travel from one financial center to another,
provided an ambiguous territory that kept trade moving and many in a constant state of anxiety as to the destination of their eternal souls. Some merchants steered clear of the whole business, convinced it was a sin. Some less scrupulous operators were happy about the Church’s position because it scared off the squeamish and reduced the competition. The practical effect was that long-term loans became difficult, because a bill of exchange must always be paid in no more than the time officially required to reach one of the major European centers. Capital investment suffered. The bank became anchored to trade rather than manufacturing and was forced to become international, when otherwise it might well have stayed local. Loans were more expensive than they need have been, and highly speculative. “Exchange is a bird of passage,” warns one banking manual, “grab it while you can, it won’t be back!” Above all, there was constant tension between what people said they were doing, what they knew they were really doing, and what they knew they were supposed not to be doing. Meantime, every letter between banks on whatever matter always carried an avviso, a warning, or announcement, of currency rates on that day. Already information was of the essence. Stare sugli avvisi, to be on your guard, came to mean to deal in bills of exchange. On your guard! Such is the special excitement of dealing in money: am I winning or losing, am I going to heaven or hell?
One of the ways Giovanni di Bicci had always been on his guard was in his determination to have close relations with the Church, the ultimate source of capital: spiritual, political, and monetary. While in Rome, he had met the extrovert Neapolitan priest Baldassarre Cossa. Was it Giovanni di Bicci who funded the man’s purchase of a cardinal’s hat in 1402? It’s not clear. In any event, Cossa took to addressing the banker as “My most dear friend,” in his many letters.
In 1410, Cossa was elected pope and became Giovanni XXIII (but not, of course, the Giovanni XXIII of the Second Vatican Council—of which more later). Down in Rome, Ilarione di Lippaccio de’ Bardi, brother of Giovanni di Bicci’s partner Benedetto and now director of the Medici bank’s Rome branch, immediately became Depositary of the Papal Chamber. Which is to say, the Medici bank in Rome now held the pope’s cash, collected his vast incomes, paid out his vast expenditures. They lent him money for war on Naples and they lent him more money to pay the reparations when he lost the war. Indispensable—and friendly too!—the bank began to suggest whom the pope might appoint to this or that bishopric, then collected the fees due when the appointee took up his position. Obviously, the bankers only proposed candidates who were in a position to pay promptly. Throughout Giovanni di Bicci’s life, and much of Cosimo’s, more than 50 percent of the Medici bank’s profits came from Rome.
To invest that holy income (in ambiguous bills of exchange), the bank had already opened two new branches in major trading centers, Naples and Venice. The relationship of these branches to each other and to the central office in Florence was to be crucial. The Bardi and Peruzzi banks that had preceded the Medici collapsed in part because of bad debts to foreign monarchs, but in part also because there was no juridical distinction between its operations in different countries. The bank as a whole was liable for the debts of each of its outlets. If money is allowed to flow without restraint, a sudden movement will tip the boat. Worse, in order to fund such a huge international operation, the Peruzzi in particular had brought a large number of partners into what was a single, monolithic organization, with the result that eventually they lost overall control. When money began to leak drastically from one or another branch and the ship listed, the various partners began to argue. It was hard to steer to a safe haven.
Giovanni di Bicci resolved these difficulties with a simple structural correction, and in doing so revealed at once what was to be the genius of the Medici family: its manipulation of people within organizational structures—first financial, but later social and political too. Each branch was to be a separate company. The shareholders were: the branch director, to the tune of something between 10 and 40 percent, and then the Medici bank for the rest. Not the Medici family personally, and not the Florence branch, which had the same status as the other branches, but rather a separate holding company located in a separate office in Florence. In this way, a large number of capital-bearing partners could be brought in—one or two in each branch and one or two more important figures in the holding—without the Medici themselves ever losing control of either the parts or the whole.
A branch director would receive expenses and a considerably larger percentage of the profits than his own share of the investment would appear to warrant. This to motivate him. In return, he was obliged under contract to live in his branch’s city and to observe the rules enforced by the holding company: Don’t lend more than 300 florins to cardinals; to courtiers no more than 200; don’t give credit to any Roman merchant, unreliable; nor to feudal barons, not even if they give you security (barons are a law unto themselves); and never, never lend money to Germans, since their courts won’t respect your claim if, or rather when, things go wrong.
Between cashiers, letter writers, messenger boys, and managers, there were about four to eight people in each branch—all working, eating, and sleeping in the same building, sharing the same one or two servants, slaves, and horses. The holding company in Florence was responsible for all hirings and firings. And salaries. Otherwise, who knows what complicity might arise between a branch director and his staff in a distant city? In addition to the official ledgers, there was also a “secret book” in which the director wrote down such things as the discretionary deposits of clients who wished to remain anonymous. And salaries. No one must know another’s salary. There must be no opportunity for private gripes and local conspiracies against the head office. The secret book was made of parchment, not paper, to last longer, and kept under lock and key, often in the director’s bedroom. Once a year it would be taken to Florence for discussion. Above all, each branch dealt with the others as with any other company. Each was part of a whole, but simultaneously in competition; each running its own show, but under observation. Thus the Medici learned the techniques they would later apply in the political sphere: Divide, be reasonably generous, and rule.
Yet at once it became clear that however sophisticated the structure you formulated, the choice of staff would always be crucial. To make money, you need astute men and honest. And healthy. No sooner had Castellano di Tommaso Frescobaldi been appointed, in 1400, to run things in Naples than he fell sick and died. Good management can do nothing about the plague. Neri di Cipriano of the once-noble Tornaquinci family became the first director in Venice, in 1402, and immediately broke contract by lending money to Germans. Even Poles! He never recovered it. Faking the books, both manifest and secret, he invented a first-year profit and borrowed at 8 percent to have further capital, which he went on losing. Since the Medici did not routinely send inspectors to their various branches, it was three years before the now-considerable reversal of nearly 14,000 florins was discovered. Dealing in money is so exciting because its liquid nature makes the losses as great and as swift as the profits. The medieval wheel of fortune has speeded up. Everything is levered and intensified. Condemned by the Venice courts, Tornaquinci surrendered his belongings and fled to Cracow, where he recovered some of the Medici cash from the Poles but did not return it to the Medici. Eighteen years later, hearing that Tornaquinci had fallen into poverty in Poland, Giovanni di Bicci sent him 36 florins, enough to live on for a year and more. In the end, we know very little about Giovanni, but it’s hard not to warm to someone who could show charity to an employee who had behaved so badly.
AS WELL AS choosing the right manager, one also had to get the right pope. When Giovanni di Bicci became Giovanni XXIII’s banker, there were actually three popes in vitriolic and even bloody conflict with each other: Giovanni in Rome, Benedict in Avignon, Gregory in Naples. In the second story of the Decameron, Boccaccio suggested that it was precisely the perverse antics of the Church, its corruption and interminable internecine quarrels, that demons
trated the resilience of the Christian faith. People went on believing regardless. All the same, three popes presented a serious administrative headache. Who makes the clerical appointments? To whom do I pay tithes? Who will shrive me? Weary of the division, the Holy Roman Emperor invited all contenders to a Church Council in Constance in 1414 to settle the matter. Giovanni XXIII, who was at that point taking refuge from his various enemies in Florence, set off, and with him the Rome branch of the Medici bank. The Rome branch—take this as read from now on—always travels with the pope and his entourage. In the end, for banking purposes, Rome is the Curia, the papal court. What has there ever been in Rome, Italians still complain, but bureaucracy, ecclesiastical or secular?
Everywhere the pope went, food and accommodation prices rose, endearing him to some and half-starving others. And what with three popes and all the cardinals arriving from all over Christendom and moving a great deal of money back and forth, the Italian banks did good business in Constance. Cosimo, now twenty-five, having just married Ilarione’s distant cousin, Contessina de’ Bardi, joined his in-law to get some experience and meet some useful people. Alas, their pope came out the loser. After some tortuous diplomacy, Baldassarre/Giovanni, sensing things were not going his way, tried to scuttle the council, upon which he was arrested and accused of heresy, incest, piracy, simony, sodomy, tyranny, murder, and fornication … with more than two hundred women. Perhaps there is a wild leverage in matters of morality as well as in banking. You are the world’s spiritual leader, or the worst of all villains. You are singing in paradise or utterly damned. In any event, the culprit ceased to be pope, and in fact, so far as the Church was concerned, never had been. Hence the title of Giovanni XXIII was still available for a less-ambiguous candidate five centuries later. Meantime, the Rome branch of the Medici bank split, one half staying with the now-imprisoned Baldassarre/Giovanni and the other attaching itself to the new Pope Martin V, the two other papal pretenders having wisely retired from the field.
