U is for Usury

Usury was denounced by the Catholic church in the Middle Ages, a potential route to heresy and excommunication. But royalty, the church, and the merchants needed bankers. The bankers found ways around restrictions. The Medici thrived on banking, but it proved to be their downfall, or their rise depending on how you look at it. Lending to people in charge seems to have an inherent risk, usury or not.

Criminal Interest

Usury is defined as charging an “exorbitant” interest according to Webster’s. But there’s that third dictionary definition, listed as Obsolete. Usury was once defined as charging any interest at all. It varied with the century.

There were banks in Rome, which might charge from 5-12% interest. There were banks in the 6th century Byzantine Empire, because Emperor Justinian set loan rates, which varied by the venture: 4% for “exalted personages,” 7% for business loans, and 12% for maritime loans. The Council at Nicea centuries earlier had banned interest but for clergy, not everybody.

Yet a few centuries later, between the time of Charlemagne (750 CE) to the Black Death (1350), usury was more strictly banned. First, the Catholic church said that usury was banned to everybody, that you could not have a transaction where more was returned than was given. Even in a simple transaction, like selling a cow, the farmers had to find a just price, where they would only receive what it cost.

The big concern was that deadly sin of Avarice, which one archbishop claimed in 1043 was “the worst sin at the time.” Any kind of noticeable profit could lead to Avarice. Dante put the usurers, who earned profits from doing nothing in theory, down in the 4th circle of Hell, on the hot sands with burning bits of hellfire raining down and the scent of sulfur suffocating the air. Bruegel showed the money counters (i.e. bankers) besieged by devils and poisonous toads.

Usury at the Airport

However, there were ways to get around the ban on usury. Lenders would function as combination investor/insurer for those sea journeys. The maritime interest would be folded into maritime insurance. Or the loan would factor in risk and act more like venture capital.

This was the rising tide of commerce. Bankers were lending money for merchant ventures which traveled all over to the south and east for trade goods across the Black Sea, from China, India, or Arabia. They might sail across the Mediterranean up to Flanders or England or drive wagons through the Alps into France. So they were crossing territorial borders and using multiple currencies.

If a bank could open “branches” in multiple cities, they would handle loans through bills of exchange. I loan you money in Florence, give you a piece of paper, and you pay me back in Bruges. Since you’re going to pay me back in a different currency, I build the interest rate into the currency exchange.

There was griping, of course, at this unfair “skimming.” After all, Jesus threw out the money changers–not the money lenders–from the temple. Nobody likes to be ripped off at those currency exchange places at the airport, right? But the bankers were absorbing most of the risk, and they were creating the convenience of being able to handle the transaction in multiple cities. Factor in those costs (says the former banker/cost accountant).

The Medicis: Be Careful Who You Lend to

The Medicis were one of those family companies which was able to capitalize on their savvy business sense, timing, and ability to expand. While they also had business in the wool industry, their significant rise in fortunes came through banking. However, the bank had a quick rise and fall, lasting only about a hundred years.

Founded in 1397, the Medici bank quickly expanded to Rome, Venice, Milan, Pisa, Geneva, Lyon, Avignon, London and Bruges. Even though the family had quarrels with other powerful nobles in Florence, enough to exile Cosimo de Medici to Venice for a time, they grew in power. Eventually, their Rome bank was overflowing with deposits from the pope, and that made them powerful indeed.

As they expanded outside of Italy, up into France and Belgium, they became the banker for the powerful–from Charles VI in France to Edward IV in England. In Bruges and in London, the branch managers bet big on the royals. The London Medici bank loaned tons of money to Edward, the York contender for the throne, during the War of the Roses. He won–Edward was in. But the cost of the war had depleted Edward severely and even trying to amortize the payment over time, he couldn’t pay it back. And the London branch had also loaned to the Lancaster rebels, trying to profit off both sides. Except both sides used up their money in the war. So sorry, default. Sue me in the world court. Oh, there is no World Court? B-bye!

The Medici bank started to collapse at the end of the 15th century, having loaned money to the rich and powerful, who stayed powerful but simply declined to pay. They also had loaned money to the pope, but the Catholic church at any point could simply cry “usury” and decline to pay them as well.

Lorenzo de Medici, called the Magnificent, received shrewd political advice from Machiavelli. But not enough business advice. By the 1490s, the Medici bank started to call in the loans and prevent people from taking out their deposits, but they were over-leveraged. When Charles VIII invaded in 1494, the Medicis conceded Florence to the French and the bank became insolvent.

However, the Medicis did continue their political rise, becoming dukes and even popes, after bank had collapsed but the French had gone. The Medicis stayed as rulers in Florence, turning the city from a republic into a hereditary monarchy, until the Hapsburg-Lorraine group came along.

Interesting banking strategy. Start with hiding usury in currency exchange and end up setting your own tax policy, as long as you can keep from getting assassinated. Renaissance banking, clearly not for the faint of heart.