Monday 27th February 2017

Italy Invented Banks

by Enza Ferreri

Italian theatre show in front of the Monte dei Paschi di Siena bank

Italian theatre show in front of the
Monte dei Paschi di Siena bank

The English word "bank" derives from the Italian term "banco" (or "banca"), in turn stemming from the Frankish word "bank".

In Italian, "banco" originally referred to a bench with a back, then a bench's wooden seat, in the 1300s a shop counter, in the 1500s a craftsman workbench. Finally, from the counter where money was exchanged, collected and lent, it came to mean the institution itself offering those services.

Like for almost everything, you can find the remote origins of the banking system in ancient history. Saving and borrowing services existed among the Sumerians of ancient Mesopotamia, where private individuals felt the need to entrust their riches to priests, and among the ancient Greeks.

Other than this mainly formal recognition, banking was an Italian invention.

Banks, which originally, in ancient times, dealt with wealth's entrusting and safekeeping, later developed the function of promoting and incentivising the economy.

The modern banking industry was born and developed in Italy in the Middle Ages and early Renaissance, in the age of the Italian Communes, city-states and Signorias. Rich northern cities like Florence, Siena, Milan, Venice, Genoa and Lucca were established centres of commerce, trading with foreign states. Genoa and Venice, two of the four Italian "Repubbliche Marinare" (the others being Pisa and Amalfi), controlled the import of fabrics and spices from the Orient.

Italy was Europe's main economic power. International trade was increasing, but journeys by both land and sea to the rest of Europe and to the Orient were very long and hazardous. The establishment of banks in the main international trading centres was crucial in facilitating commerce.

That's why the letters of credit were created, to free merchants from the dangers of being robbed and killed while carrying great amounts of cash or valuable goods during their travels, which could last for months.

Letters of credit were simply the first cheques: bankers accepted to be the guarantors of payments, by signing a letter (called "of credit") which committed them to pay sums of money to the holder of the letter of credit, who was a seller of goods or services. The bank guaranteed to pay in the event that the buyer failed to pay, and also acted on behalf of the buyer by ensuring that the goods or services had been supplied and all the agreed-upon standards and quality of goods had been met by the supplier.

The use of letters of credit became a very important aspect of international trade, and was highly successful.

It was Florentine bankers who invented letters of credit and treasury bonds. During the Renaissance, therefore, Florentine bankers added the function of guarantors of payments to their other existing roles of lenders, custodians of wealth and money-changers. This turned Florence into one of the richest and most powerful cities in the world.

Florence, Cappella Tornabuoni: Annuncio dell'Angelo a Zaccaria

Florence, Cappella Tornabuoni

In the early 15th century Florence was home to around 80 banks, which lent money to kings, emperors and popes and had an income higher than that of England.

One of the oldest banks was the powerful bank founded by the Acciaioli family as early as in the 1200s, called "Compagna di Ser Leone degli Acciaioli e de' suoi consorti", which had branches in the world's main trading cities from Greece to Tunisia to Western Europe.

The bill of exchange (the modern promissory note) was also instrumental in reducing the movement of coined money. The coins were made of metal, but the letter of credit and the bill of exchange started a parallel circulation of payment means.

The families and cities from which banks took their names acquired high political prestige. Among the richest, most renowned merchant and banker families were the Bardi, Peruzzi and Pazzi in Florence in the 14th and 15th centuries, who established branches in many other parts of Europe.

The Medici Bank, founded by Giovanni di Bicci de' Medici in 1397, was what catapulted that great family to political power. Emigrated to Florence from the rural, fertile valley of the river Sieve in Mugello in the 12th century, the Medicis started as merchants in Florence's Old Market, in few decades became bankers and then rose to lords of Florence. It was the riches they acquired through banking that enabled them to be patrons of the most splendid art movement the world has ever seen.

The city of Siena, where the Chigi family emerged among the most important bankers, had great commercial and financial traditions. It is home to the world's oldest bank still in existence, the Monte dei Paschi di Siena, which has been operating continuously since 1472.

Major banking families in Genoa were the Doria, Spinola, Grimaldi, Giustiniani, Centuriani. The backbone of the Republic of Genoa turned from commerce into banking, and the Republic became lender to all European countries and monarchs. The Banco di San Giorgio (named after Genoa's patron saint, St George) was established in the city in 1406 and closed down in October 2012. It was the first bank to get involved in managing public debt and was described by Niccolo' Machiavelli as a state within the state.

Milan's Borromeo and Venice's Soranzo families were also prominent bankers.

In all these great commercial cities, families of private bankers became rich and powerful, to the point of lending money to Europe's great feudal lords, monasteries, high church dignitaries, and sovereigns. The latter made abundant use of credit to finance their wars. This activity was pivotal in the economic and political development of nation states. And wealth produced "by means of money" became an engine of social mobility, as in the case of the Medicis.

The merchant-banker was often the lord of his city. With the political decadence of many merchant-bankers, their power became indirect: they financed kings and princes, and their economic fortunes became tied with the political fortunes of monarchs.

Sovereigns and counts, often unable to pay back their loans, granted to the financiers rights of monopoly in trade, in exploiting natural resources or in services like ports, customs, tax collection. Other times they offered noble titles to the bankers. That's how, for example, Cosimo de' Medici, progenitor of a glorious dynasty, was entrusted with the lordship of Florence.

The development of banking later spread from northern Italy to the rest of Europe.

 

Photo by Elena Gatti (Creative Commons CC BY 2.0).