Florence and the Banking Machine: the Rise and Fall of the Medici Bank

The Medici Bank of the Renaissance is possibly the most famous institution from that era. Historians often state that at its height, it was larger and more powerful than any of its competitors. However, the bank only lasted for less than one hundred years, and its time at the top was even shorter. Why did it rise, and why did it fall? What were the major factors behind the success and failure of the Medici Bank? Why did it die while the family survived? In this article, I attempt to explain how such a powerful institution could rise and fall so quickly.

Before addressing the Medici Bank, it is vital to understand Renaissance banking. While banking during the Renaissance differed from today, there was one similarity: banks would hold customer deposits. Banks would then take these deposits and lend them to customers. The money earned on loans was the bank’s revenue. However, due to Catholic Church doctrine, it was immoral to charge interest on loans during the Middle Ages into the Renaissance. But when there is money to be made, people will get creative, and these ancient bankers were clever and found ways around this issue. First, they operated as merchants. They would take the money held in deposits and trade it for wool and other goods. Somehow, the Catholic Church was okay with this arrangement. However, this method only made up a small percentage of the bank’s revenues.[1]

Since operating as merchants was not earning enough income, the banks looked at other ways to earn money. They looked toward lending. However, lending required getting around the moral issues the Church presented. So, how did they do it? The three primary methods bankers used to earn money on loans were charging penalties or damages for reasons not inherent in the loan, becoming partners with the borrower, resulting in the bank receiving a share of the profits from a business deal, and finally and most popularly, they engaged in currency exchange.[2]

Currency exchange is a concept people are familiar with even today. Different currencies trade at different values. This idea meant that Renaissance bankers could lend in one currency and receive payment in another. Historian Tim Parks provides an excellent example of how this system worked. His example has a borrower in Florence taking out a loan of 1,000 florins at a rate where 1 florin is worth 40 English pence. The banker writes this rate on a bill of exchange. The customer sends this bill of exchange to his correspondent in London. This person takes the bill of exchange to the local Medici branch and pays them the 40,000 pence back. The Medici turned around and orchestrated a loan of 40,000 pence to a new customer at a rate of 1 florin, worth 36 English pence. This new rate means that when the new customer pays off this bill of exchange, the Medici will have netted a profit of 4 pence for every florin they loaned.[3] You have to give bakers credit for finding flaws in the system.

It is essential to note that the Medici did not develop these ideas. Historians do not consider the Medici innovative in their business practices.[4] They basically just followed the same steps as other banks. The question then becomes if it wasn’t innovation that caused the rise of the Medici Bank, then what was it? 

Historian Paul Strathern has the Medici forming due to a vacuum in banking that began in the late 1300s.[5] The three central Florentine banks during the early 1300s collapsed shortly before the Black Death that began in 1348. They likely collapsed due to an overextension of credit to sovereigns.[6] The obvious issue is that banks could not enforce their debts to sovereigns. If a king did not wish to repay their loan, the loan would not get paid.[7] Of course, I have to ask: if you can’t make a king repay a loan, how do you say no to giving him one? I don’t have the answer, but it made me curious.

Giovanni di Bicci established the family’s head banking office in 1397, which historians view as the bank’s establishment date. Giovanni took a conservative approach to running the bank. The conservative approach is an idea that would exist even after his death.[8] The conservative approach avoided the sovereign banking mistakes of the now-defunct 14th-century banks. (Giovanni clearly figured out the issue I raised above) Conservativism is also related to caution in lending. Giovanni’s successor, Cosimo, was worried about the cumulative effect of bad loans and informed his branch managers they were cautious in their lending.[9] Considering the bank’s success under Giovanni and Cosimo, it is not a stretch to say that this conservative approach assisted in the rise of the bank. They played it safe and decided steady growth was better than rapid expansion. However, as we will see later, Cosimo eventually abandoned the approach that made him successful. 

One area in which Giovanni was willing to take risks was in his efforts to obtain the papal accounts. In 1402, Giovanni lent a tremendous amount of money to Baldassare Cossa. This loan was far more than Giovanni would typically lend to customers. However, Giovanni hoped that Baldassare would advance the bank’s position with the Church. Baldassare was made Pope in 1410, and suddenly, the Medici were the papal bankers. Why was the role of the papal banker so important? The papacy was involved in various business transactions, and their bank would get large commissions from facilitating these transactions. The income from enabling the papal businesses was so significant that over half of the Medici Bank’s profits came from its two Rome branches.[10] While the bank’s relationship with the papacy would fluctuate, no other bank was as closely tied to the institution during these years.

The Medici saw a secondary benefit of being the papal bankers. Late in the bank’s life, they secured the papal alum mines in Tolfa. Alum was an essential industrial item. The Medicis would reap enormous profits from this business.[11] I will point out that it should not shock many to discover that the Catholic Church was a relatively corrupt institution during the Renaissance. The Medicis did not create the papal income stream. Rather, they were just better at manipulating it to their benefit. Without question, the relationship with the papacy was one of the major factors in the Medici Bank’s success.

The final reason for the success of the Medici Bank is its use of the subsidiary system. Each of their branches in different nations would operate as its own business. However, they answered to the main branch in Florence. Giovanni and Cosimo closely monitored their managers and regularly provided input into their operations. This arrangement is similar to how business subsidiaries operate today. The Medici would pick their branch managers from their staff. The main office would not pay the managers a salary. Instead, managers would earn a share of the profits.[12] This system would motivate branch managers to achieve the highest profits possible. While this arrangement is the final reason the bank was successful, in the end, it will also be responsible for the bank’s failure. 

After establishing how the Medici Bank rose to prominence, the question becomes how it fell. Historian Raymond de Roover had this to say regarding the downfall of the Medici Bank: “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 the disturbances in the Levant and transfer difficulties in settling Italian claims on Northern Europe.”[13]

The first issue to address is the idea that business conditions worsened and, as a result, played a significant role in the Medici Bank’s demise. As de Roover points out, wool prices dropped dramatically because English wool became available in smaller quantities. Not only would decreased trade hurt the Medici’s merchant business, but it would also remove an item borrowers often used to settle claims.[14] Economic conditions would have also been depressed due to the ongoing wars in the region. To defend his claim, de Roover cites the decreasing number of banks in Florence with the idea that it was not just a Medici problem. 

De Roover’s claims are not without their detractors and flaws. Historian Richard Goldthwaite states that from 1460 to 1500, the number of companies reported by the banking guild annually averaged between 35 and 40 and remained consistent.[15] Goldthwaite also notes that de Roover used the decreasing guild numbers as evidence that banks were suffering. However, Goldthwaite believes these numbers reflect guilds decreased economic function in general.[16] Supporting Goldthwaite is that de Roover claims that the banking issues extended beyond Florence. This idea appears to be contradicted by the fact that Venice did not see its significant banks start to fail until 1499.[17] That would place the crisis in Venice five years after the Medici Bank closed and many years after it lost its relevance. Furthermore, de Roover hurts his point when he notes that the bank began its decline with the death of Cosimo in 1464.[18]

The following three ideas of poor management, ill-advised policies, and structural weakness de Roover supplies relate to two significant changes in the Medici. The first is that the Medici wanted to start working toward gaining political power and influence, and the second is that Cosimo died. Cosimo’s successors could not live up to Cosimo’s business acumen. It was this combination that doomed the Medici Bank. 

Giovanni was content to gather wealth and live in the background when he ran the bank. However, historian Christopher Hibbert notes that Cosimo was more ambitious than Giovanni, with plans extending beyond the business realm.[19] Cosimo succeeded in using his money to gain power. By the time of his death, he was considered the most powerful man in Florence.[20] That level of power and influence does not come without cost. 

Cosimo made enemies to such a degree that they managed to exile him from Florence for a short time. I must acknowledge that some historians argue that Cosimo turned this exile to his benefit.[21] Even if that is true, political enemies would be a problem plaguing the family for its existence. Years after Cosimo’s death, the Medici almost lost its most prominent member, Lorzeno, to assassins during the Pazzi Conspiracy episode. The family did lose Lorenzo’s brother. The Pope backed the Pazzi conspirators, so as a result, the Medici lost their papal presence for a time. Florence was also declared an enemy of the Papal States and Naples. As stated previously, the papal accounts were vital to the Medici Bank. Losing them for any period was crushing for the bank. 

The second cost of playing politics in Renaissance Italy is monetary. To achieve the highest rungs in politics, the Medici had to spend their money, which was the bank’s. Florence’s aristocracy in the 1400s embraced a culture of lavish spending. In order to prove their place above others, the aristocrats had to spend wildly on themselves and public projects. No family better exemplified this idea than the Medici. Cosimo’s spending defined what it meant to be an aristocrat in 15th-century Florence.[22] Cosimo took advantage of the humanism wave in Florence to enhance his authority and social ranking.[23] Now, instead of putting profits back into the business like they used to, the Medici were pulling cash out of the bank. 

Not all the money the Medici spent in the name of politics was on lavish goods. In 1431, Florence was in debt after a series of military blunders. Cosimo ordered the Medici Bank to issue loans to Florence to cover as many debts as he could, knowing that Florence would never repay the loans.[24] This event is just one example of the many instances of the Medici Bank issuing loans, knowing repayment was not likely. Historian C. W. Previte Orton explains that Cosimo gained popularity with the public because of his generous loan policy.[25] The Medici leaders were choosing politics over payment. This is a great idea if you want to be politically popular but terrible if you’re looking to run a business. Credit must be given to Cosimo because he managed to balance his political maneuverings while keeping the bank successful.

The Medici Bank may have survived if Cosimo’s successors remained at his level, but his son Piero and grandson Lorenzo did not share his business mind. Piero took over after Cosimo’s death and, by all accounts, did his best to run the bank. However, he made a series of blunders that only worsened the situation. First, he called in many of Cosimo’s Florentine loans. This move would lead to many businesses going bankrupt and a significant economic downturn.[26] It would also strengthen the cause of the Medici enemies. The Medici enemies managed to pry control of the Florentine electoral process from the Medici, which they had gained total control of during Cosimo’s lifetime. Piero eventually salvaged the situation, but it cost him political favors with one of his enemies, and he had to amass an army of 8,000 men.[27]

Piero died young, so control of the family was left to his twenty-year-old son, Lorenzo. Lorenzo had never received training in how to operate the bank. More importantly, Lorenzo had no desire to learn how to handle the bank.[28] Lorenzo appeared to view the bank only as his personal fund for his lavish lifestyle. The problem was that Lorenzo’s spending was beyond what the Medici Bank could provide. He went outside the bank for loans and used the bank’s reputation as a guaranty.[29] Lorenzo spent so lavishly that at the time of his death, he was challenging Cosimo’s reputation as a builder and patron of the arts.[30] Cosimo had long been the standard bearer for all patrons, but he was doing it when the bank was making large profits. A good example of Lorenzo’s lavish spending is a collection of over sixty hardstone vases that historians closely tie to Lorenzo. This collection rivaled the French King’s.[31] I’m not one to judge, but I think you’re spending to just to spend when you’re trying to outdo the French King’s vase collection.

Lorenzo also used the bank for political gain, similar to his grandfather Cosimo. After the Pazzi War in 1480, Florence found itself in desperate need of arms for its soldiers. Lorenzo leveraged the Medici Bank’s wealth and prestige to control their procurement. However, while historian Fabrizio Ansani notes this may be a rare occasion where Lorenzo’s political maneuvers made the family money, it still provides an example that even in the bank’s dying days, Lorenzo was using its reputation.[32] The Medici used the bank as a source of personal wealth, which they used for personal patronage and public loans.[33]

Lorenzo’s lavish spending alone did not cripple the bank. What hurt the bank more was his complete disregard for running it. Lorenzo left the bank, running to Francesco Sassetti and the branch managers. Sassetti was not the man for the job. He could not control his branch managers, and they began to make a series of poorer and poorer business decisions. The most significant mistake might be failing to live up to the rules placed by Giovanni and Cosimo. The branch managers started giving loans to sovereigns.[34] (cue ominous music) These were the type of loans that brought down the Medici Bank’s predecessors. Giovanni and Cosimo avoided these loans because these entities were unlikely to repay the debt. Furthermore, according to de Roover, the managers gave these rulers the impression that the Medici Bank was an unlimited source of funds.[35] I don’t need to explain to you that opening the vault to people who will never replenish it is a terrible idea.

Soon, branches began closing, and people knew that the bank was failing. Lorenzo initially attempted to save the bank but eventually gave up. In 1494, the French invaded Florence and overthrew the Medici. The French seized the Medici Bank and dissolved the branches. Political maneuvering, lavish spending, poor control, and disinterest led to the most powerful bank of the 15th century ceasing to exist. 

The Medici Bank rose to prominence through strong management. It utilized a conservative approach to lending and knew what areas were worth the risk. Giovanni and Cosimo’s ability to gain and retain papal banking rights was instrumental in its rise. They also remained hands-on with their branches and created an environment for their managers to succeed. However, after Cosimo died, the lavish spending, political maneuvering, and disregard for management led the bank to an early demise. The bank stopped taking a conservative approach and risked its money with royalty and other ventures. Lorenzo spent the bank’s money like his own and ignored the branches. In many ways, his approach was the opposite of his predecessors. The bank may have died anyway since it was starting to decline under Cosimo, but without question, Lorenzo accelerated its death with his abysmal management. 

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[1] Tim Parks, Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence (London: Profile, 2013), 39-40.

[2] Raymond De Roover, The Rise and Decline of the Medici Bank, 1397-1494. (Cambridge: Harvard University Press, 1963), 10-11.

[3] Parks, 41-44.

[4] Richard A. Goldthwaite, “The Medici Bank and the World of Florentine Capitalism,” Past & Present, no. 114 (1987): 5, http://www.jstor.org/stable/650959.

[5] Paul Strathern, The Medici: Power, Money, and Ambition in the Italian Renaissance (New York, NY: Pegasus Books, 2016), 20.

[6] De Roover,  29.

[7] Strathern,  17.

[8] Ibid, 26

[9] De Roover,  92.

[10] Christopher Hibbert, “The Rise and Fall of the Medici Bank,” History Today, 1974 Aug 01, 1974, 526, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/magazines/rise-fall-medici-bank/docview/1299027156/se-2?accountid=12085.

[11] Mary Hollingsworth, The Family Medici: The Hidden History of the Medici Dynasty (New York: Pegasus Books Ltd., 2018), 134.

[12] De Roover,  80.

[13] Ibid, 3

[14] Ibid, 373-374

[15] R. A. Goldthwaite, “Local Banking in Renaissance Florence,” Journal of European Economic History 14, no. 1 (1985 1985): 43, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/local-banking-renaissance-florence/docview/1292866160/se-2?accountid=12085.

[16] Ibid, 43

[17] Juraj Kittler, “Too Big to Fail: The 1499-1500 Banking Crisis in Renaissance Venice,” Journal of cultural economy 5, no. 2 (2012): 165, https://dx.doi.org/10.1080/17530350.2012.660783.

[18] De Roover,  70.

[19] Christopher Hibbert, The House of Medici, Its Rise and Fall (New York, NY: Harper Perennial, 2003), 33.

[20] Hibbert, The House of Medici, Its Rise and Fall, 55.

[21] Frederick E. Gaupp, “Cosimo De’ Medici’s Banishment — a Farce?,” The Mississippi Quarterly 14, no. 1 (1960): 14-19, http://www.jstor.org/stable/26473223.

[22] Gene A. Brucker, Renaissance Florence, vol. Book, Whole (Berkeley: University of California Press, 1983), 121-27.

[23] Mark Jurdjevic, “Civic Humanism and the Rise of the Medici,” Renaissance Quarterly 52, no. 4 (1999): 999, https://dx.doi.org/10.2307/2901833.

[24] Strathern,  55.

[25] C. W. Previte Orton, “The Medici,” History 32, no. 116 (1947): 81, http://www.jstor.org/stable/24402429.

[26] Hollingsworth,  134.

[27] Ibid, 141

[28] Strathern,  147.

[29] Hollingsworth,  162.

[30] F. W. Kent, Lorenzo De’ Medici and the Art of Magnificence (Baltimore, UNITED STATES: Johns Hopkins University Press, 2004), 84.

[31] Eva Helfenstein, “Lorenzo De’ Medici’s Magnificent Cups: Precious Vessels as Status Symbols in Fifteenth-Century Europe,” I Tatti Studies in the Italian Renaissance 16, no. 1/2 (2013): 415, https://dx.doi.org/10.1086/674434.

[32] Fabrizio Antonio Ansani, “A ‘Magnificent’ Military Entrepreneur? The Involvement of the Medici Bank in the Arms Trade (1482-1494),” Business history  (20, https://dx.doi.org/10.1080/00076791.2021.1944112.

[33] John F. Padgett, and Christopher K. Ansell, “Robust Action and the Rise of the Medici, 1400-1434,” American Journal of Sociology 98, no. 6 (1993): 1302, http://www.jstor.org/stable/2781822.

[34] A. Sapori, “The Medici Bank,” PSL quarterly review 2, no. 11 (2014): 205, https://dx.doi.org/10.13133/2037-3643/12855.

[35] De Roover,  364.