The Medici family

Prior to 1390s, the Medici were more gangsters than bankers; a small-time clan, notable more for low violence than for high finance. Between 1343 and 1360, no fewer than five Medici were sentenced to death for capital crimes. Then came Giovanni de Bicci de’ Medici. It was his aim to make the Medici legitimate. And through hard work, sober living and careful calculation, he succeeded.

In 1385, Giovanni became manager of the Roman branch of the bank run by his relation Vieri di Cambio de’ Medici, a moneylender in Florence. In Rome, Giovanni built up his reputation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican’s coffers. It was an age of multiple systems of coinage, some gold, some silver, some base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another.

Of particular importance in the Medici’s early business were the bills of exchange that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. This was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank’s books. There was no interest; depositors were given ‘discrezione’ (in proprotion to the annual profits of the firm) to compensate them for risking their money.

The Medici did not invent these techniques, but they applied them on a larger scale than had hitherto been seen. The real key to the Medici’s success was not so much size as diversification. Whereas early Italian banks had been monolith structures, easily brought down by one defaulting debtor, the Medici bank was in fact multiple related partnerships, each based on a special, regularly renegotiated contract. Branch managers were not employees but junior partners who were remunerated with a share of the profits. It was this decentralization that helped make the Medici bank so profitable.

Though others had tried before them, the Medici were the first bankers to make the transition from financial success to hereditary status and power. They achieved this by learning a crucial lesson: in finance, small is seldom beautiful. By making their bank bigger and more diversified than any previous financial institution, they found a way of spreading their risks. And by engaging in currency trading as well as lending, they reduced their vulnerability to defaults.