The Rise and Decline of the Medici Bank, 1397-1494

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HARVARD STUDIES IN BUSINESS HISTORY

XXI

THE RISE AND DECLINE OF THE MEDICI BANK

1397-1494

by

RAYMOND DE ROOVER

Edited by

HENRIETTA M. LARSON

Professor of Business History

Graduate School of Business Administration

George F. Baker Foundation

Harvard University

TABLE OF CONTENTS

Contents

TABLE OF CONTENTS 4

DEDICATION 5

EDITOR’S INTRODUCTION 6

AUTHOR’S PREFACE 8

TABLES 11

DIAGRAMS 14

CHART 14

ILLUSTRATIONS 15

I—INTRODUCTION 16

II—THE MEDICI BANK AND ITSINSTITUTIONAL BACKGROUND 23

1. THE CHURCH’S USURY DOCTRINE AND THE BUSINESS WORLD 23

2. THE MONEY-CHANGERS’ GILD AND THE MEDICI BANK 28

3. THE FLORENTINE CATASTO 36

4. MONETARY SYSTEMS USED IN THE MEDICI RECORDS 47

III—THE ANTECEDENTS AND THE EARLY YEARS OF THE MEDICI BANK UNDER THE MANAGEMENT OF GIOVANNI DI BICCI, 1397-1429 50

IV—THE HEYDAY OF THE MEDICI BANK:COSIMO AT THE HELM, 1429-1464 72

V—THE LEGAL STATUS AND ECONOMIC STRUCTURE OF THE MEDICI BANK 102

1. THE CENTRAL ADMINISTRATION 102

2. BRANCH MANAGEMENT 112

3. CORRESPONDENCE AND ACCOUNTING PROCEDURE 121

4. TIME DEPOSITS 125

VI—BANKING AND THE MONEY MARKET AT THE TIME OF THE MEDICI 134

VII—THE MEDICI AS MERCHANTS AND AS DEALERS IN ALUM AND IRON 173

1. THE VENTURE TRADE 173

2. THE ALUM MONOPOLY 183

3. THE IRON ORE OF ELBA 196

VIII—THE MEDICI AS INDUSTRIAL ENTREPRENEURS 199

IX—THE MEDICI AND THE FINANCIAL BUSINESS OF THE PAPACY: THE ROME BRANCH OF THE MEDICI BANK 228

X—MEDICI ESTABLISHMENTS IN ITALY: THE TAVOLA IN FLORENCE AND THE FONDACO IN VENICE 262

1. FLORENCE 262

2. VENICE 280

XI—MEDICI ESTABLISHMENTS IN ITALY: THE BRANCHES IN NAPLES, MILAN, AND PISA 295

1. NAPLES 295

2. MILAN 302

3. PISA 318

XII—BRANCHES OF THE MEDICI BANK OUTSIDE ITALY: GENEVA, LYONS, AND AVIGNON 322

1. GENEVA 322

2. LYONS 334

3. AVIGNON 357

XIII—MEDICI BRANCHES OUTSIDE ITALY: BRUGES AND LONDON 364

1. THE MEDICI BANK IN BRUGES AND LONDON PRIOR TO 1451 364

2. THE LONDON BRANCH FROM 1451 TO 1480 374

3. THE BRUCES BRANCH FROM 1451 TO 1473 392

4. THE DIFFICULTIES WITH TOMMASO PORTINARI (1473-1481) AND THE DISASTROUS LIQUIDATION OF THE BRUCES AND LONDON BRANCHES 400

XIV—THE DECLINE: 1464-1494 413

APPENDIX 434

CHRONOLOGICAL LIST OF THE GENERAL MANAGERS AND BRANCH MANAGERS OF THE MEDICI BANK 434

LIST OF DATES AND EVENTS IMPORTANT FOR THE HISTORY OF THE MEDICI BANK 438

GENEALOGICAL TABLES 440

BIBLIOGRAPHY 460

Manuscript Sources 460

Published Sources and Secondary Works 466

REQUEST FROM THE PUBLISHER 484

DEDICATION

To

Abbott Payson Usher

EDITOR’S INTRODUCTION

The Rise and Decline of the MediciBank marks a new departure for the HarvardStudies in Business History. It is the first in the series dealing wholly with business in Europe and it records the operations of an enterprise centuries ahead in time of the subjects of the other volumes. However, it is concerned with an institutional development, that of banking, which is represented by four earlier volumes in the Studies, and, like them, its emphasis is on the process of administration.

The Medici Bank was the most powerful banking house of the fifteenth century. It served as financial agent of the Church, extended credit to rulers, and facilitated international trade in Western Europe. By their personal influence and the use of their profits, the leading owners and administrators of the bank contributed to the development of Florence as the greatest center of the Renaissance. The history of this medieval business enterprise contributes to our knowledge of one of the great eras of European economic and cultural growth.

The special value of this volume to the Studies derives from the fact that the Medici Bank was close to the historical source of modern investment and commercial banking. Indeed, it conducted a type of business that was the medieval ancestor of that performed centuries later by a British and an American banking house represented by two volumes in the Studies: The House of Baring in American Trade and Jay Cooke, Private Banker.

The economic system within which the Medici operated was far different from that of the Barings or of Jay Cooke and his associates. These nineteenth-century firms worked in an international and a rapidly developing industrial and commercial economy with a broad market base. The fifteenth-century bankers also operated internationally, but within a business system made up largely of merchants and bankers serving principally Church, State, and Aristocracy.

Although operating in a different world, this medieval firm was in many respects similar to the Barings’ and the Cookes’ of the modern era. Like them, the Medici banking house was built by strong and creative entrepreneurs. It had a principal partnership with branches or correspondents in leading business centers. It had centralized policy making, at least in theory, and decentralized management of operations, with resulting problems of control. It largely worked with other people’s money, and at times it took high risks in employing capital profitably. Indeed, it ran into serious difficulties from a complexity of causes. All three concerns, regardless of time or circumstance, demonstrated the importance of wise judgments in decision making and of a workable balance between centralized policy making and control and decentralized management of operations.

Although the author of The Rise and Decline of the Medici Bank is well-known to historians, a brief introduction may be of interest to other readers. Belgian by birth, by early academic training, and by business experience (as an accountant, successively, in a bank and in the largest shipping firm in Antwerp), Raymond de Roover came to the United States to attend the Harvard Graduate School of Business Administration, where he received the M.B.A. degree in 1938. While at Harvard he studied business history with N. S. B. Gras and economic history with A. P. Usher. Later he studied economic history and economic theory at the University of Chicago, where he received the Ph.D. degree. He is Professor of History at Brooklyn College.

Professor de Roover has published several books and many articles on the history of banking, negotiable instruments, accounting, and economic thought. His earlier and shorter version of the history of the Medici Bank, which was published by the New York University Press, received the Herbert Baxter Adams Prize of the American Historical Association. His Money, Banking and Credit in Medieval Bruges was awarded the Charles Homer Haskins Medal of the Mediaeval Academy of America. His Gresham onForeign Exchange; an Essay in EarlyMercantilism was sponsored by the Harvard Graduate School of Business Administration and published by the Harvard University Press. A book in French on the history of the bill of exchange was published by the École Pratique des Hautes Études with a subsidy from the government of France. For his contributions as a scholar, Professor de Roover, a naturalized citizen of the United States, was elected a foreign member of his native land’s Royal Flemish Academy of Sciences, Letters, and Fine Arts.

In a publication of the Harvard Graduate School of Business Administration, it is especially appropriate to note, as suggested by Professor de Roover, the contribution of Dr. Florence Edler de Roover to this study of the Medici Bank. It was at this School that Mrs. de Roover, as a member of the business history group, first worked in the business records of the Medici family, of a branch engaged in manufacturing. It was she who later introduced her husband to the rich records in Italy of the banking house of the Medici. Although she disclaims participation in the authorship of the volume, Mrs. de Roover, as a Renaissance scholar, a student of Florentine and Lucchese history, and the author of the Glossary of Mediaeval Italian Terms of Business (published by the Mediaeval Academy), contributed ideas and criticism and assisted in the research in the records of the Medici Bank.

The cost of publishing this volume has been underwritten by the Harvard Graduate School of Business Administration. This is further evidence of the value placed by the administrators of this school on research and publication in the history of business as a contribution to business education and to knowledge of the historical background of our economic system and of the society which it serves.

Henrietta M. Larson

April 24, 1962

AUTHOR’S PREFACE

This book is the outcome of three years of research in the Florentine archives and supplants a much shorter essay on the same subject published in 1948 by the New York University Press. As this earlier publication was based on secondary sources which were not always reliable, it contains quite a few factual inaccuracies, but it gives nevertheless a general picture which is substantially correct and has not been altered very much in this new version. Therefore, libraries possessing the older version should not discard it, since it may be useful for readers who are pressed for time and who want to gather a general impression without bothering much about details. Moreover, the appendices, mainly abstracts from an account book kept by the Medici Bank in Bruges, are not reproduced in this new volume.

The first version was little more than a sketch. Systematic research has uncovered so much source material that it became possible to redo the job entirely and to write a new book which tells the story in greater detail, fills in many of the gaps, and uses the quantitative data brought to light by the discovery of the libri segreti, or the secret account books of the Medici Bank (1397-1450). The overall picture of the Bank as a going concern has been brought into better focus and mistakes based on inadequate information have been corrected. Hypothesis, to a large extent, has been replaced by certitude, especially with regard to the structure of the Bank, which, from 1397 to 1455, foreshadowed the modern holding company, with the understanding that it was an agglomerate of partnerships rather than of corporations. The new evidence proves that the Medici Bank may properly be called a bank, because it emphasized banking more than trade and trade more than manufacturing. The statistical data now available settle this question once and for all.

After this book went to press Dr. Gino Corti reported the discovery in the Florentine Archives (Conventi soppressi, Archivio 79, vol. 119) of the libro segreto, or personal account book, kept by Ilarione di Lippaccio de’ Bardi, who was general manager of the Medici Bank from 1420 until his death around Christmas 1432. A microfilm copy of this manuscript reached me too late to make many changes, but it does not matter much. Although the libro segreto of Ilarione de’ Bardi furnishes new and valuable information about the management of his household and estate, it contains little that is new concerning the Medici Bank and gives the same data about capital structure and allocation of profits that are found in Libro segreto No. 2 of the Bank itself. This is not surprising, since both manuscripts are in Ilarione’s own hand with the exception of a few posthumous additions.

In recent years our knowledge of medieval banking has advanced with great strides. In no small measure, this progress is due to the pioneering efforts of Professor A. P. Usher who pointed the way leading to the final solution of many perplexing problems, especially those connected with the use of the bill of exchange as a transfer and credit instrument. As my teacher at Harvard, he urged me to enter this field, advice which I followed and never regretted. It is, therefore, proper that this book be dedicated to him.

This project would never have been carried out without the grant of a Fulbright Research Fellowship and the generous aid of the John Simon Guggenheim Memorial Foundation. This assistance enabled me to spend three full years in Italy, one year as a Fulbright Research Fellow (1951-1952) and two years as a Guggenheim Fellow (1949-1950 and 1952-1953).

My greatest debt is to my wife, Dr. Florence Edler de Roover (Signora Fiorenza to all our Italian friends), whose name should perhaps appear on the title page, but she steadfastly declines to assume any responsibility for a work bristling with statistical tables. (Her horror of them is unjustified, since I prepared and typed all the tables, leaving to her the easier job of the regular text, the footnotes, and the bibliography!)

The idea of rewriting my first and rather superficial essay really originated with laSignora. While I was visiting relatives in Belgium during the Christmas season of 1949, she wrote me from Florence that she had made a little exploratory tour of the Medici archives and that there was plenty of material which was still untouched and had been overlooked by earlier historians. The letter contained a summons to rush back to Italy and to abandon all other projects in order to delve into the records of the Medici Bank. From then on, my wife took charge of all the research involved in this new scheme. With her usual efficiency in such matters, she proceeded to go systematically through the inventory of the Medici Archives prior to the Principate (Mediceo avanti il Principato), quite a job, since there are thousands of cards or schede. Without this laborious process, it would have been impossible to find one’s way through the jungle of the Medici papers. It was also my wife who discovered the secret account books of the Medici Bank in a mislabeled bundle (No. 153). At a later stage, when it came to writing the book, my wife continued to give me invaluable help with advice and criticism in matters of style and arrangement.

Next to the Signora Fiorenza, my greatest debt is to Dr. Gino Corti who acted as our research assistant and gave us devoted service in transcribing many of the letters and other documents. His flair for unearthing relevant material in unexpected places made available information that otherwise would have escaped our attention.

We wish to remember the late Dr. Ferdinando Sartini, Director of the State Archives in Florence, and to thank the present archivist, Dr. Sergio Camerani, and his wife, Dr. Giulia Camerani Marri, and the other staff members who, by the flexible application of regulations, greatly facilitated our research. Professor Federigo Melis deserves our gratitude for calling my wife’s attention to Bundle No. 153 which, upon close inspection, proved to contain the secret account books of the Medici Bank instead of miscellaneous fragments.

In the course of my research, several persons kindly made helpful suggestions or supplied additional information. They are so numerous that it would be difficult to mention all of them. In particular, I am grateful to Professors Frederic C. Lane and Armando Sapori for raising stimulating questions, to Louis Marks for calling our attention to Parenti’s chronicle and the documents in the Strozzi papers concerning Lorenzo’s misappropriation of public funds, to Peter Partner for helping me with the identification of some members of the Roman Curia under Martin V, and to Warman Welliver for calling my attention to Lorenzo’s correspondence with his ambassador, or orator, in Milan.

Professor Ralph W. Hidy read the manuscript before it went to press and wisely suggested that Chapter II be condensed. Professor Henrietta M. Larson, the editor of this series and an old friend, generously gave me the benefit of her long editorial experience. She read the manuscript throughout and made numerous suggestions for improvement. Chapter I was added and other chapters were cut or partly rewritten in accordance with her recommendations. I am greatly indebted to her not only for her editorial work on the manuscript but also for making arrangements for publication.

Mention should also be made of Miss E. Louise Lucas of the Fogg Art Museum, who was helpful in selecting the illustrations.

The completion of this manuscript relieves me of a burden which I have carried for ten years. It is true that other projects repeatedly interfered and slowed up my progress on the Medici Bank. I am glad that my task is finished and I only hope that my labors will not be in vain but will contribute something to a better knowledge of the economic background of the Italian Renaissance.

Raymond de Roover

Brooklyn College of the City University of New York

Brooklyn, New York

October, 1963

TABLES

1. Tax due from Cosimo de’ Medici and Pierfrancesco, his nephew, according to their return for the catasto of 1457

2. Progressive scale of the catasto of 1481

3. Tax paid by Lorenzo the Magnificent according to the catasto of 1481

4. Distribution of taxpaying households according to the Florentine catasto of 1457

5. List of the taxpayers who paid more than 50 florins according to the 1457 catasto

6. Correspondents of the firm Averardo di Francesco de’ Medici in 1395

7. Staff of the Medici Bank on March 24, 1402 (N.S.)

8. Profits of the Medici Bank from 1397 to 1420

9. Profits assigned to the partners of the Medici Bank, 1397-1420

10. Capital of the Medici Bank in 1420

11. Profits of the Medici Bank from 1420 to 1435

12. Division of profits between the partners, 1420 to 1435

13. Balance of the Medici Bank on November 1, 1441

14. Balance of the Medici Bank on March 24, 1451

15. Capital structure of the branches of the Medici Bank on March 25. 1451

16. Amounts invested by outsiders in the capital of the Medici branches on March 25, 1451

17. Profits of the Medici Bank from 1435 to 1450

18. Profits assigned to the partners of the Medici Bank from 1435 to 1450

19. Status of the branch managers of the Peruzzi Company shortly before June 30, 1335

20. Size of the staff of the Medici Bank around 1470

21. Balance sheet of the Ragionedi Corte, or the Medici branch at the Curia, July 12, 1427

22. Exchange and rechange between Venice and London

23. Exchange and rechange between Venice and Bruges

24. Exchange and rechange between Bruges and Venice

25. Exchange quotations in Florence around 1450

26. Correspondents of the Medici Bank in various places with the list of their authorized agents (1455)

27. Account of one hundred bales of almonds sold by the Medici branch of Bruges

28. Account of eight bales of cardamom sold by the Bruges branch of the Medici Bank

29. Data on output and profits and losses of the woolshop styled Cosimo de’ Medici e Michele di Baldo & Co., 1409-1420

30. Data on output and profits of the woolshop styled "Lorenzo de’ Medici e Taddeo di Filippo & Co., 1408-1429

31. Statement of assets and liabilities of the woolshop managed by Taddeo di Filippo according to the catasto report of 1427

32. Statement of assets and liabilities of the Medici silkshop, 1497 (?)

33. Balance sheet of the Rome branch of the Medici Bank, July 12, 1427

34. Investment of the Rome branch in other Medici companies

35. Debit balances exceeding 1,000 cameral florins according to the balance sheet of the Rome branch

36. Deposits a discrezione listed in the balance sheet of the Rome branch

37. Credit balances exceeding 1,000 florins in the ledger of the Rome branch on July 12, 1427

38. Balances due from correspondents abroad according to the balance sheet of the Rome branch

39. Balance sheet of the Basel branch of the Medici Bank, March 24, 1442

40. Net profits of the Rome branch, 1439-1450

41. Statement of assets and liabilities of the Medici’s Florentine Tavola, July 12, 1427

42. Balances of other Medici companies with the Tavola of Florence, July 12, 1427

43. Clerical staff of the Tavola in Florence, 1414

44. Net profits of the Florentine Tavola from 1440 to 1450

45. Net profits of the Venice branch from the beginning of 1406 to the end of 1415 (Florentine style)

46. Profits of the Venetian branch from 1420 to 1434 (Florentine style)

47. Balance sheet of the Medici Bank in Venice, 1427

48. Profits of the Venice branch from 1435 to 1440 (Florentine style)

49. Profits of the Venice branch from 1441 to 1450 (Florentine style)

50. Profits of the Medici Bank in Naples and Gaëta from circa 1400 to September 1420

51. Balance sheet of the Milan branch, March 24, 1460

52. Profit and loss statement of the Milan branch, 1459 (Florentine style)

53. List of the amounts borrowed a discrezione by the Milan branch, March 24,1460

54. Balance of the Pisa branch, 1486

55. Exchange quotations at the fairs of Geneva around 1450

56. Allocation of the profits of the Geneva branch from 1424 to 1432

57. Allocation of the profits of the Geneva branch from 1435 to 1450

58. Net profits of the Geneva branch from 1461 to 1465 (Florentine style)

59. Division of capital and profits of the Lyons branch on March 25, 1466

60. Balance sheet of the Lyons branch, April 2, 1467

61. Loans to lords, temporal and spiritual, according to the Lyons balance sheet of April 2, 1467

62. Time deposits according to the balance sheet of April 2, 1467

63. Profit and loss statement of the Lyons branch, 1466 (Florentine style)

64. Profits of the Lyons branch from 1466 to 1472 (Florentine style)

65. Profits of the Avignon branch from 1461 to 1471 (Florentine style)

66. Profits allocated to the partners by the Avignon branch, 1461-1471

67. Net profits of the Bruges branch from 1439 through 1443 (Florentine style)

68. Net profits of the London and Bruges branches from 1447 through 1450 (Florentine style)

69. Balance sheet of the Medici Bank’s London office, November 12, 1477

70. Statement of the profits and losses of the Bruges and London branches according to a memorandum of Lorenzo the Magnificent, 1479

71. Settlement of accounts between Lorenzo the Magnificent and Tommaso Portinari, February 15, 1481

DIAGRAMS

1. Real exchange transaction between Venice and London

2. Example of dry exchange between Venice and Bruges

CHART

Internal organization of the Medici Bank around 1455

ILLUSTRATIONS

COSIMO DE’ MEDICI, PATER PATRIAE, HEAD OF THE MEDICI BANK, 1429-1464. Marble relief by Andrea del Verrocchio. Formerly in Kaiser Friedrich Museum, Berlin (Frontispiece)

1. GIOVANNI DI BICCI DE’ MEDICI, FOUNDER OF THE MEDICI BANK. Painting by Agnolo Bronzino, Palazzo Medici-Riccardi, Florence. From an Alinari photograph by permission

2. PAGE OF LIBRO SEGRETO No. 3, 1435-1450, folio 97. From the original by courtesy of the Florence State Archives

3. RECTO AND VERSO OF A PROTEST WITH BILL OF EXCHANGE ATTACHED, October 22, 1463. From the original by courtesy of the Florence State Archives

4. PIERO DI COSIMO DE’ MEDICI. Marble bust by Mino da Fiesole, Museo Nazionale, Florence. From an Alinari photograph by permission

5. FRANCESCO SASSETTI WITH HIS ELDEST SON, TEODORO. Painting by Domenico Ghirlandaio. Reproduced by courtesy of the Metropolitan Museum of Art. The Jules S. Bache Collection, 1949

6. GIOVANNI TORNABUONI, MANAGER OF THE ROME BRANCH, 1465-1494. Fresco by Domenico Ghirlandaio, Church of Santa Maria Novell Florence. From an Alinari photograph by permission

7. PORTINARI CHAPEL, CHURCH OF SANT’ EUSTORGIO, MILAN. From an Alinari photograph by permission

8. COURTYARD OF THE MEDICI BANK IN BRUGES. From a Brusselle photograph, Bruges, by permission

9. ANGELO TANI AND HIS WIFE, CATERINA TANAGLI. From the wings of the triptych The Last Judgment, by Hans Memling. Reproduced by courtesy of the Muzeum Pomorski, Gdansk (Danzig), Poland

10. TOMMASO PORTINARI AND HIS WIFE, MARIA BANDINI-BARONCELLL Portraits by Hans Memling. Reproduced by courtesy of the Metropolitan Museum of Art. Bequest of Benjamin Altman, 1913

11. DETAIL OF THE TRIPTYCH THE LAST JUDGMENT, by Hans Memling. Reproduced by courtesy of the Muzeum Pomorski, Gdansk

12. LORENZO THE MAGNIFICENT. Terra-cotta bust by Andrea del Verrocchio. Reproduced by courtesy of the National Gallery of Art, Washington, D. C. Samuel H. Kress Collection.

13. ENTRANCE OF CHARLES VIII OF FRANCE AND HIS ARMY INTO FLORENCE, November 17, 1494. Painting by Francesco Granacci, Uffizi Gallery, Florence. From an Anderson photograph by permission

I—INTRODUCTION

Modern capitalism based on private ownership has its roots in Italy during the Middle Ages and the Renaissance. From the Crusades to the Great Discoveries, Italy was the dominant economic power in the western world, and its merchants were the leading business men. They were the middlemen whose trade relations linked the Levant to the shores of the North Sea. As in Roman times, the Mediterranean had once more become the Mare Nostrum, the Italian sea over which the flags of Genoa, Pisa, and Venice held undisputed sway. Spices from the Orient were perhaps the backbone of the Italian trade, since there was always a market for them in the West, but the merchants of Italy handled other goods, among which silkstuffs, cloth, and wool were the principal ones. Gauged by modern standards, the volume of international trade was small, since it was more or less confined to luxury products, although it was by no means exceptional for cheap and bulky products, such as wheat or timber, to travel long distances.

The Italians were not only the principal merchants but also the principal bankers. In this field, their monopoly was nearly complete, the Catalans being only distant competitors. By far the best customer of the Italian banking and mercantile companies was the Church. The flow of papal remittances was scarcely less important than currents of trade and, according to circumstances, might either promote equilibrium or tend to disrupt it. Pawnbrokers and money-changers served local needs for credit accommodation, but foreign banking, that is, dealing in bills of exchange, was primarily in the hands of the Italian merchant-bankers.

This hegemony of the Italians rested largely upon superior business organization. As a matter of fact, they laid the foundations for most of the business institutions of today. Not only did they create the partnership, but they developed means for managing companies which had branches in foreign lands, thus overcoming the handicap of distance by forms of remote control. Joint-stock companies did not originate until the beginning of the seventeenth century, but the Medici Bank already foreshadowed the holding company in certain respects. The Italian merchants also developed double-entry bookkeeping (the first unquestionable examples in 1340), invented the bill of exchange in draft form, and experimented with marine insurance. In the field of banking, the Italians did not discover the bank note, but they mastered the art of making payments by book transfer on the strength of oral or written orders. Since medieval banks operated on a fractional reserve principle, they created fiduciary money to the extent that transferable deposits were not entirely covered by cash in till or in vault. Another noteworthy contribution is that the Italian merchants evolved a body of mercantile law, customary at first, but codified later in ordinances, such as the famous Ordonnance du Commerce promulgated in 1673 by Louis XIV. Its rules, more or less universally adopted, still form the basis of commercial, or business, law today.

In the fourteenth and fifteenth centuries, the major Italian trading centers were Florence, Genoa, and Venice. As Genoa and Venice were coastal cities, their activity was oriented toward the sea, especially the trade with the Levant, though they also sent ships to England and Flanders through the Straits of Gibraltar. During the same two centuries, Florence, located inland, was perhaps the leading banking place. It also possessed flourishing woolen and silk industries and traded in spices and other luxury products. In 1406 it conquered Pisa and its port, Porto Pisano, and thus acquired direct access to the sea.{1}

A distinctive feature of Florentine business organization was the existence of large mercantile and banking companies which controlled a network of branches abroad. These companies, of course, were partnerships rather than corporations. Large companies of this type, mostly Sienese, had been established as early as the first quarter of the thirteenth century. Siena, at the present time a sleepy Tuscan town, was perhaps for seventy-five years the main banking center in Europe, with Piacenza, another inland town, as a close rival. The largest of Sienese companies was the Gran Tavola (great table or bank) of the Bonsignori. It failed in 1298, and it is said that Siena never completely recovered from this blow. Its place was taken by Florence.

Between 1300 and 1345, the most powerful Florentine companies were those of the Bardi, the Peruzzi, and the Acciaiuoli. The Florentine chronicler, Giovanni Villani (1276-1348), who had been for a while a partner of the Peruzzi company, called them the pillars of Christian trade, by which he meant presumably the main supports of the western trade in the Mediterranean area.{2} All three companies collapsed shortly before the Black Death (1348), which is believed to have wiped out one third of the population of Europe. The crash was probably caused by overextension of credit and excessive loans to sovereigns, especially to Edward III (reigned 1327-1377), King of England, and to Robert (1309-1343), the Angevin King of Naples. Such loans were a perennial threat to the solvency of medieval companies. Yet, the Italian companies always became involved in them, probably because it was difficult to avoid doing business with courts, a major outlet for the luxury products in which they were dealing.

As a measure of the size of these companies, it may be noted that in 1336, the Peruzzi, the second largest of the big three, had fifteen branches scattered all over Western Europe and the Levant, from London to Cyprus, and employed a staff of about ninety clerks, or factors.{3} In 1310 its capital amounted to nearly 103,000 gold florins, or approximately $412,000 at the present valuation of gold at $35 an ounce.{4} This was a considerable sum, especially since the purchasing power of money was then much greater than it is today. According to Villani, when the Peruzzi company failed in 1343, Edward III of England owed them the value of a realm.{5} The Acciaiuoli, the smallest of the three companies, in 1341 had a staff of forty-three factors residing abroad.

After the disappearance of the three companies, the Pope was unable to find a banking firm that offered him the same facilities for the transfer of papal revenues or subsidies. Eventually the Alberti, a Florentine firm that had weathered the storm successfully, took advantage of the elimination of its rivals and succeeded in capturing the papal business. However, the Alberti company soon split into several rival firms because of family quarrels and, thereby, was greatly weakened. Moreover, some of the leading members of the family fell into disgrace with the ruling Florentine oligarchs, with the result that, from 1382 to 1434, the entire Alberti clan was sent into exile. The place of the Alberti was taken by the Medici, the Pazzi, the Rucellai, and the Strozzi. Although the Medici succeeded in overshadowing their competitors, they never attained the size of the Bardi or the Peruzzi, the giants of the fourteenth century. The year 1397 may be regarded as the founding date of the Medici Bank, for in that year Giovanni di Bicci de’ Medici,{6} who had been managing a bank in Rome, decided to transfer his headquarters to Florence. The Bank lasted for nearly a hundred years, until 1494, when the Medici were expelled from Florence and all their property, business investments as well as real estate, was sequestrated and put into the hands of receivers. In the course of that century, the Medici Bank went through a period of expansion, which ended with Cosimo’s death in 1464, and a period of decline, which, slow and gradual at first, gained momentum after 1478, the year of the Pazzi conspiracy, which shook the Medici edifice to its foundation. As we shall see, the downfall was caused by a combination of poor management, ill-advised policies, structural weaknesses, and adverse business conditions which certainly worsened after 1470 owing to the shrinking volume of international trade, a contraction probably caused by disturbances in the Levant and transfer difficulties in settling Italian claims on Northern Europe.

Fortunately, the business records of the Medici Bank have been preserved in sufficient quantity to give a fairly detailed picture and to illuminate the inner workings of the Bank, the crucial problems of management and control and the formulation of policies, whether good or bad. True, the extant material is uneven and full of gaps, but it is more nearly complete than for any other medieval firm, the Datini business archives in Prato (Tuscany) excepted.{7}

For the period prior to 1451, one of the major sources is a set of libri segreti (confidential ledgers) discovered in 1950 in a mislabeled bundle.{8} These account books are three in number and, without a breach of continuity, cover a period of more than half a century, from March 26, 1397, when the Medici Bank was established, to March 24, 1451. Such libri segreti were usually kept by one of the partners and not entrusted to a bookkeeper. They contained the partners’ accounts concerning investments and withdrawals, the accounts for operating results, the accounts of capital allocated to branches, and sometimes the salary accounts of the factors and clerks. Since the Medici libri segreti follow this same pattern, they give us valuable information on the capital structure of the firm as a whole and the profits earned by the different branches from year to year. These data, however valuable, are mainly statistical and give little information about policy. Business letters would have filled this gap. Unfortunately, few have survived for the period before 1450.

After 1450, the reverse is true: the correspondence becomes more abundant, but account books, with the exception of a few rather unimportant fragments, are missing. As a result, there are no quantitative data that would portray in expressive graphs the waning fortunes of the Medici Bank. The letters, however, unfold the tragedy in even more eloquent, if less precise, language. They show how matters slowly but inexorably went from bad to worse, how one branch after another ran onto the rocks or was refloated with great difficulty, how the Bank incurred huge losses because of insubordinate and prevaricating branch managers, how the top management failed to curb their activities, and how rifts over policy led to bickerings and mutual recrimination which hastened the downfall by preventing the application of efficacious remedies.

Besides letters and account books, the surviving records include a fair sample of partnership agreements, several balance sheets, and miscellaneous documents, such as bills of exchange, protests, deposit certificates, confidential reports and memoranda, and even a reorganization plan which was never carried into effect. Although incomplete, these records tell a story which may be amended in details, but which, on the whole, will not need revision.

Why study the Medici Bank? There are a number of reasons why such a study should be rewarding.

The Medici are well-known in history because of the prominent role they played in the Italian Renaissance as political figures or as patrons of letters and fine arts. However, their activity as bankers and traders did not attract the same degree of attention. Yet, it was economic power that made it possible for the Medici to seize political power and that also provided the financial resources which enabled them to commission artists, to promote humanism, to collect a magnificent and unique library (the Laurenziana, still existing), and to spend huge amounts on monumental buildings, such as the church of San Lorenzo, the Dominican friary of San Marco, or the Badia of Fiesole. The Medici, from Giovanni di Bicci down, were not of the middle class, as some sociological historians have held, since the tax records show that they were by far the richest family in the entire city of Florence and occupied the upper rung of the social ladder.{9}

The history of the Medici Bank adds to our knowledge of the roots of modern business. From the standpoint of business history, this study brings out one main point: techniques have changed, but human problems have remained the same. How to pick out the right person and put him in the right place was as much a problem for the Medici as it is in business today.

Because of easier communications, the problem of control has taken different aspects, but it has not, therefore, been eliminated. The Medici Bank, especially after 1464, suffered from lack of coordination, and branch managers were at odds because they failed to understand each other’s problems. How to coordinate different branches or departments continues to be a major issue confronting administrators in business as well as in government. As in the case of the Medici, mounting losses often sharpen conflicts, which then stand in the way of necessary adjustments to new conditions.

Although a midget by modern standards, the Medici Bank was the largest banking house of its time. Nevertheless, it failed to match the size of the Bardi and Peruzzi companies of earlier years, probably because conditions had ceased to be as favorable to large concerns. In contrast to the two or three centuries preceding the Black Death, which were characterized by almost continuous growth, historians now regard the fifteenth century as a period of stagnation, if not of regression. Of course there were ups and downs, but the troughs were more numerous than the peaks, and the Medici records suggest that the depression deepened after 1470 and lasted two or three decades.

Despite a declining volume of trade, organizational techniques continued to improve, perhaps because keener competition and falling profit margins put a premium on efficiency. The Medici Bank, its records show, certainly used the best methods available. From this standpoint, it was probably not typical, but rather represents the optimum that was achieved in the Middle Ages and the Renaissance. However, there is no evidence that Giovanni di Bicci and his son Cosimo were so successful because they were innovating entrepreneurs who introduced new products or new ways of doing business. On the contrary, their success was mainly due to the efficient use of existing methods and proven techniques. It is, for example, decidedly a legend that the Medici ever invented the bill of exchange. Perhaps they were creative in devising the holding company form of organization and in forming the alum cartel.

From the point of view of economic history, this study may perhaps be termed microeconomic, since it focuses its attention on a single firm. This firm, however, must be considered in its proper setting. For example, the Medici, like everyone else, had to observe the rules of the game when operating in the money market. In spite of the fact that they had a quasi-monopoly of the alum trade, they were unable to exploit their advantage to the full because they ran afoul of organized consumer groups. In Milan, their main customer was the Sforza court, but in England the situation was entirely different and they were mainly concerned with wool, which they needed as much to fill the galleys on their homeward trip as to feed the Florentine looms and to provide employment for a restless proletariat. Frequently the Medici had no control whatsoever over economic conditions or political forces: all they could do was to set their sails to the wind and to make the best of a given situation, such as the War of the Roses in England or the crisis touched off by the Pazzi conspiracy. God help it is a favorite expression used in the Medici letters whenever political events or business prospects took an unexpected or unfavorable turn.

As this study will show, the Medici reached a highly developed and capitalistic form of organization, if capitalistic means that their aim was to make profits and that ultimate control rested with the owners of the capital invested in the business. In actual practice, however, major or strategic decisions, such as the establishment of a new branch or the renewal of a partnership contract, were always made in consultation with the general manager, who was very powerful, although he had only a minor share in capital and profits. Managerial or operational decisions were usually delegated to him and he did not need to consult the partners belonging to the Medici family in routine matters or day-to-day administration. One of the general manager’s main tasks was the supervision of the branch managers in order to prevent their making undue commitments or unwise investments. Not an easy task! Because of slow communications and great distances, branch managers enjoyed quite a bit of autonomy; it was perhaps a weakness of the Medici Bank that they had too much leeway. Cosimo ruled his branch managers with a firm hand, but his successors relaxed their grip—with disastrous consequences.

There is no doubt that men such as Giovanni di Bicci and Cosimo di Giovanni were imbued with a capitalistic spirit of acquisitiveness and were bent upon accumulating great wealth. They actually built up a huge fortune which, after the manner of the time, was mostly invested in landed property, that is, in extensive holdings in the Mugello and farms scattered all over the surrounding countryside, especially in the direction of Prato and Signa, where Lorenzo the Magnificent built the villa of Poggio a Caiano. The Medici certainly were not satisfied with a modest living befitting their rank of simple citizens. Their social aspirations grew with each succeeding generation. Soon they strove to achieve princely status, although even Lorenzo the Magnificent continued to affect republican simplicity in his dress. The ascent of the family is perhaps better illustrated by their marriage alliances: the leading Florentine families first, the high nobility next, and finally the sovereign houses of Europe.

The results of this investigation belie the Max Weber thesis, according to which the capitalistic spirit is supposed to be a product of the Calvinist Reformation. The Medici antedated the reform movement by several decades, but to deny that they were capitalists engaged in the pursuit of wealth would be doing them more than slight injustice.

Capitalism in the age of the Medici meant, of course, commercial capitalism. As balance sheets show, the assets of the Medici Bank consisted primarily either of claims or of goods in stock, very little being invested in equipment. This is even true of the manufacturing establishments controlled by the Medici, since only simple tools were used in the production process, and, for the most part, they were owned by the workers themselves. What the employers supplied was the materials with which to work. Depreciation was known and bookkeepers sometimes made provisions for this purpose, but such items, it should be emphasized, were never more than a negligible fraction of operating cost. Industrial capitalism does not appear until the Industrial Revolution led to heavy investment in machinery and hence to high depreciation charges. In the Middle Ages, with the possible exception of mining and shipping, investment in fixed capital was small.

Industrialism is a recent phenomenon; it did not emerge in the age of the Medici. Theirs was an age in which big business—according to the standards of the time—was still confined to trade and banking. While the Medici emphasized banking rather than trade, they still combined both, a typical combination. Apparently the volume of international trade was not large enough to justify specialization in one line of business. Besides, high risks and unstable conditions were further inducements to diversify. As professor N. S. B. Gras once wrote, scratch an early private banker and you find a merchant.{10} There was regional specialization. The Medici, unlike the Bardi and the Peruzzi, never operated in the Levant; their sphere of action was confined to Western Europe with the exclusion of Spain and Portugal. They made a timid attempt to penetrate into the Baltic, but they failed. There the Hanseatic League reigned supreme and did not brook any invasion of its territory. The domain of the Italian merchant-bankers did not extend east of the Rhine. West of it, they were in exclusive control. While competition between Florentines, Genoese, and Venetians was strong enough to prevent the transformation of this vast area into a colonial territory, Italian hegemony had nevertheless the beneficial effect of welding it into something like a common market.

II—THE MEDICI BANK AND ITSINSTITUTIONAL BACKGROUND

Before entering into the heart of the subject, there are four topics of general import which may best be considered in the beginning as they provide threads running through the entire fabric of this book.

The first question to be considered is simply this: since the Church forbade the taking of interest, how did it happen that the Medici and other bankers were able to operate and lend money at a profit without laying themselves wide open to charges of usury? An answer to this question involves, of course, the entire problem of the relationship between the Church and the business world at the time of the Medici. An attempt will be made to determine whether the teachings of the Church actually influenced business practices; if so, how and to what extent.

The next problem deals with the place of the Medici Bank within the Florentine gild system. As bankers, the Medici came under the jurisdiction of the Arte del Cambio, or the Money-changers’ Gild. It will be shown that the gild’s regulatory powers were rather limited and did not carry great weight in the ordinary course of business.

Another topic deserving consideration is that of the catasto, a Florentine direct tax, which was based on individual returns filed with the tax officials, a procedure very much like that in use today in connection with the income tax in the United States, Great Britain, and other countries. Thousands and thousands of these returns, with almost no gaps, are still preserved in the Florentine archives. In this book extensive use has been made of the tax reports, not only of the Medici but also of their connections. These reports have been useful in many ways, for genealogical and biographical details as well as for quantitative or economic data. It is necessary, therefore, to introduce the reader to this important source of information and to tell him something about the origins and the administration of the catasto and the Florentine public debt.

A fourth topic which calls for comment is money. The purpose is not to write a treatise on medieval money, but to give the reader some guidance concerning the monetary units and symbols which appear in the Medici records and which will be used in subsequent chapters.

If the reader is pressed for time or eager to dip into the main theme of this book, he may skip this chapter for the present and postpone reading it until he comes across some puzzling difficulty. However, it is preferable to be systematic; pains have been taken to reduce this background material to a minimum compatible with an orderly presentation of each subject.

1. THE CHURCH’S USURY DOCTRINE AND THE BUSINESS WORLD

Medieval banking cannot be understood without keeping in mind the usury doctrine of the Church. Since the bankers, in this regard, tried as much as possible to comply with religious precepts, they had to operate without incurring the censure of the theologians. As a result, banking in the Middle Ages and even much later—on the Continent until far into the eighteenth century—was quite different from what it is today. It would be erroneous to believe that the usury doctrine was simply disregarded and had scarcely any effect on banking practices: on the contrary, as the available evidence proves, it exerted an enormous influence. First of all, the need for evading the usury prohibition, by legitimate means if possible, affected the entire structure of medieval banking. Second, it determined how the banks operated. And third, the usury doctrine, by recognizing certain transactions as licit and declaring others to be illicit, influenced business ethics and public opinion.

Medieval bankers, such as the Medici, might have conceded that some of their practices were on the fringe of legitimate business, but they would have disclaimed vigorously that they were manifest usurers; actually, they were not so regarded by the public. The more rigorous theologians, however, might have made reservations, but theological opinion did not necessarily agree with the views commonly held by practical men ignorant of casuistic subtleties.

To understand fully the scholastic position it is best to follow the same method of analysis as that used by the scholastic writers. What was usury? According to canon law, usury consisted in any increment, whether large or small, demanded above the principal solely on the strength of a mutuum, the legal term for a straight loan.{11}Quidquid sortiaccedit, usura est (whatever exceeds the principal is usury). In this definition, each word has its importance. Consequently, usury in the Middle Ages did not apply to exorbitant rates only, but extended to all interest, whether high or low, excessive or moderate. By definition, a loan was a gratuitous contract. If it ceased to be such, it ipso facto became a usurious contract.{12} The dictum was: usura solum in mutuo cadit.{13} In other words, usury occurred only in a loan, whether a straight loan (overt usury) or a loan concealed under the color of another contract (palliate usury).{14} If it could be shown that a given contract was neither explicitly nor implicitly a loan, there was no usury involved. No reward could be claimed for lending in itself, but it was licit to demand damnumet interesse, or damages and interest, for other reasons not inherent in a loan, such as failure to repay the principal at maturity. Thus arose the doctrine of extrinsic titles which, because of its many loopholes, involved the theologians in endless difficulties.

It is impossible to go now into all the aspects of the usury problem: an exhaustive treatment would require volumes. Moreover, the Italian merchants—it is less true of the Spaniards—paid scant attention to the fine distinctions which the scholastic writers relished so much. According to the simplified and somewhat distorted version in circulation among the laity, usury was any certain gain exacted by virtue of a loan, especially if fully secured by pledges.{15} On the other hand, it was considered legitimate to receive compensation whenever a credit transaction was speculative or involved any risk or compulsion. Rightly or wrongly, interest was often passed off as a gift or a share in the profits of a business venture.{16} In fact, there were innumerable ways of circumventing the usury prohibition and, it must be said, they were encouraged by the quibbles of the Doctors. Approaching the problem from a legal point of view, the latter, unwittingly, gave the merchants a chance to make the most of technicalities.

The ban against usury did not halt the growth of banking, but recent research has shown that it certainly diverted the course of this development. Since the taking of interest was ruled out, the bankers had to find other ways of lending at a profit. The favorite method was by means of exchange by bills (cambium per litteras).{17} It did not consist in discounting as practiced today, but in the negotiation of bills payable in another place and usually in another currency. Interest, of course, was included in the price of the bill which was fittingly called a bill of exchange. Although the presence of concealed interest is undeniable, the merchants argued—and most of the theologians accepted these views—that an exchange transaction was not a loan (cambium non est mutuum) but either a commutation of moneys (permutatio) or a buying and selling of foreign currency (emptio venditio).{18} In other words, the exchange transaction was used to justify the credit transaction, and speculative profits on exchange served as a cloak to cover interest charges. Nevertheless, it was argued that cambium was not usurious, since there could be no usury where there was no loan.{19}

The practical consequence was to tie banking to exchange, be it manual exchange or exchange by bills. It is perhaps significant that the bankers’ gild of Florence was called the Arte del Cambio, or the Moneychangers’ Gild. In the account books of the Italian merchant-bankers, including those of the Medici, one rarely, if ever, finds traces of discount, but there are thousands and thousands of entries relating to exchange transactions. There is no account for interest income, but an account entitled Pro e dannodi cambio (Profit and Loss on Exchange). If this matter had not been so important because of the link with banking, there would have been no point to the elaborate discussion which most treatises on moral theology devote to licit and illicit exchange.{20} In the fifteenth century the subject was already receiving considerable attention in the works of Messer (Sir) Lorenzo Ridolfi (1360-1442), San Bernardino of Siena (1380-1444), and San Antonino (1389-1459), archbishop of Florence, all three contemporaries of Giovanni di Bicci and Cosimo de’ Medici.{21} Later on, it was discussed with great competence by Fra Santi (Pandolfo) Rucellai (1437-1497), who became a Dominican friar in his old age after being widowed.{22} Since he was the son of a banker and had been in business himself, one must assume that he knew well how banks operated.{23} Hence, his emphasis on exchange dealings is significant. One even finds chapters dealing with this matter in merchant manuals, such as the curious treatise of Benedetto Cotrugli written in 1458.{24} In view of these discussions, there is no doubt that the Church’s position toward usury had a real influence upon the conduct of business.

It is untrue that the bankers openly disregarded the teachings of the Church.{25} To be sure, they were not always consistent and often violated the precept against usury in private contracts. It does not follow, however, that there were many who pertinaciously questioned a doctrine erected into a dogma by the Church.{26} On the contrary, many a banker had an uneasy conscience about his unholy deals. Overwhelming evidence is given in the numerous medieval testaments in which the testator ordered restitution of all usury and ill-gotten gains.{27} True, such clauses became scarcer after 1350 because the merchant-bankers, while still continuing to make bequests to the Church for the salvation of their souls, were less and less eager to be branded as self-confessed usurers by referring specifically to restitution in their wills.

Moreover, they contended, with a semblance of truth, that they were engaged in legitimate business and not in usurious activities. In fact, they did shun illicit contracts as much as possible. Even the Pratese merchant-banker, Francesco di Marco Datini (1335-1410), although ruthless and grasping, boasted in letters to his wife that he had never made illicit profits. When his branch manager in Barcelona became involved in questionable exchange dealings, he was promptly rebuked by an irate master and told to desist.{28} The same attitude reveals itself in the correspondence of ser Lapo Mazzei (1350-1412), Datini’s advisor and notary. In the partnership agreements of the Medici, illicit exchange was as a rule expressly forbidden, although this provision was not always carried out, as account books and other records prove. It is, therefore, understandable that Cosimo de’ Medici himself was troubled by qualms about ill-acquired wealth and secured a papal bull which allowed him to atone for his covetousness by endowing the monastery of San Marco in Florence.{29}

These attitudes persist into the sixteenth century and even later. In 1517 and again in 1532, a group of Spanish merchants in Antwerp decided to consult theologians about the licitness of certain exchange dealings.{30} The Spaniard, Simon Ruiz (1526-1597), one of the leading bankers in Medina del Campo, refused to participate in any dubious contracts.{31} As late as the reign of Louis XIV, the draper, Jacques Savary (1629-1690), author of Le Parfait Négociant, a celebrated merchant manual, warns his readers against including interest in the face value of a bill or a note; this is usury, he contends, but it is permissible to speculate on the exchange.{32}

If it had not been for the usury doctrine, why would the merchants have adopted a cumbersome procedure when simpler methods were available? It is far easier to discount instruments of debt than to work with bills of exchange payable abroad in foreign currencies. First of all, this procedure complicates bookkeeping.{33} Next, it requires the bankers to operate with a network of correspondents in other places. Another drawback is that lenders, as well as borrowers, have to speculate and to run the risks of adverse exchange fluctuations. Moreover, the purchaser of a bill is exposed to loss not only through the insolvency of his debtor, but also through the failure of the correspondent to whom he sends a remittance. This is perhaps why the big bankers preferred to operate with their own branches. As for the borrower, if he had no funds standing to his credit in another place, he had to find someone willing to accept his drafts and to pay them when due. The drawee or payor would then have to recover his outlay at his own risk. The use of the bill of exchange thus increased both trouble and expense, so that the practical result of the usury prohibition, intended to protect the borrower, was to raise the cost of borrowing. To this extent the Church’s legislation on usury may have retarded economic growth.

As Professor A. P. Usher has pointed out, the bill of exchange, or letter of payment, introduced by the Italian merchants in the fourteenth century was a distinctively new instrument.{34} Its extensive use was doubtless favored by the usury doctrine. From the point of view of commercial law, the effects were beneficial because the popularity of the bill of exchange led to the emergence of mercantile customs and legal rules which eventually culminated in the general acceptance of the principle of negotiability. One should not underestimate the legal and economic consequences of the toleration of the exchange contract by the moralists.{35} This toleration, by involving them in so many contradictions, contributed a great deal to the breakdown of their whole position.

By operating on the exchange, the bankers, taking advantage of a permissible form of contract, succeeded in evading the ban against usury. The important result was that bankers were not stigmatized as usurers. On the contrary, they lived as respected citizens and often played leading roles in their communities. The great Italian bankers prided themselves on being called the Pope’s money-changers. Their sons, if they went into holy orders, received preferment and became popes, cardinals, or bishops. The Medici family offers several examples, but they are by no means the only ones. The odium attached to usury swerved around the merchant-bankers to fall with all its impact on petty money-lenders and pawnbrokers.{36} In Florence, as elsewhere, they were branded as manifest usurers and ostracized by all respectable citizens. In accordance with canon law, the poor wretches lived under the ban of the Church, were deprived of the sacraments and of Christian burial, and were even unable to make valid testaments.{37}

Paradoxically, no such dreadful fate befell big bankers like the Medici because they professed not to engage in moneylending, but to confine their activities to licit contracts. Indeed, according to scholastic doctrine, this position was justifiable since there existed