In my last post, I wrote about the Medici family and its rise as a banking power. Despite their success, however, banking is not what they are primarily known for. By degrees, they entered into the spheres of politics (becoming hereditary Dukes of Florence and marrying into the royal lines of France, Spain, and the Holy Roman empire), religion (four Popes were Medici), and culture (ushering in Renaissance humanism and patronizing renowned artists). How did a group of bankers rise to such heights?
As I mentioned in my prior post, the Medici set up bank branches all over Europe. The original charters for the branches stipulated two important rules. First, the manager of the bank (who had nearly complete control over banking decisions) would supply a significant portion of the initial capital to open the branch. The reason for this practice was, of course, that a manager who has a stake in the bank will be more careful with its assets.
A second stipulation stated that under no circumstances was a manager allowed to mix banking and politics. The Medici observed that using money for political outcomes inevitably led to a net loss for the bank; such expenses gained power and favor but no profit. Political rulers were an especially bad risk. A typical borrower was unlikely to default since pressure could be applied by a magistrate or through social mores, whereas the only real incentive for a ruler to make loan payments was the prospect of securing a greater loan. Furthermore, rulers invariably wanted loans to finance a war, and if the ruler lost the war, the bank would never receive payments.
As easy as these rules are to state, they were not so easy to follow. Cosimo the Elder, the son of Medici patriarch Giovanni di Bicci, was in 1436 the de facto ruler of Florence, although all of his power was exercised through favors and financial pressure. At that time, the major city-states in Italy battled constantly for control of minor regions, and they fought these battles with mercenary armies. At one point, Cosimo, seeing a threat from Milan, decided that the most expedient way to defeat the Milanese aggression was simply to buy off the mercenary army. This was the first explicit use of bank resources to address a political issue.
A second instance of mixing banking and politics occurred with a loan to Henry V of England. Henry V refused to allow the Medici to export wool from England to Italy unless they gave him a loan.
After Cosimo, Lorenzo the Magnificent further violated the two banking rules. Managers were allowed to set up branches without supplying capital. As a result, those managers were less risk averse and began using bank money to buy political favors and advantageous marriages, hopeful of gaining admittance into the nobility. Further, some managers indulged in practices that enriched their own branch at the expense of other branches which ended up going bankrupt.
In fact, Lorenzo himself became more interested in political life than in the banking business. He began to apply his talent and money to political and cultural life. He became intensely interested in poetry and Platonism, and he patronized artists such as Leonardo da Vinci and Michelangelo. He also began spending large sums of money to advance his second son, Giovanni, in the church and to provide a dowry for his daughter to marry the son of the Pope.
Despite Lorenzo’s growing political and cultural successes, the Medici family fortune was rapidly diminishing. As the money ran out, so also did much of Lorenzo’s support. Internal enemies, religious reaction to humanism, and the incompetent actions of his son Piero led to the exile of the Medici for eighteen years soon after Lorenzo’s death.
Thus the banking empire of the Medici was destroyed. It rose on the careful actions of Giovanni di Bicci and fell with the political fortunes of his offspring.
Despite this setback, later Medici family members rose again to become major players in Italy for the next two hundred years. Eventually, Lorenzo’s son Giovanni became Pope Leo X, and with his aid, the Medici family fought their way back to power and were eventually given Florence as a hereditary dukedom.
But that is another story.
