he commission was that bit larger.
There was one huge possibility created by the emergence of money as a system of mutual trust – a possibility that would revolutionise world history. It was the idea that you could rely on people to borrow money from you and pay it back at some future date. That’s why the root of “credit” is “credo”, the Latin for “I believe”. Without the invention of credit, the entire economic history of our world would have been impossible.
That’s what the Conquistadores got wrong. They failed to see that money is about trust – even faith. Trust in the person paying you the money, trust in the central bank issuing the money, trust in the commercial bank that honours the cheque. Money isn’t metal. It’s trust inscribed. And it doesn’t much matter what it’s inscribed on – paper, silver, clay, or a screen – provided the recipient believes in it.
The puzzle is that the early moneylenders got so little thanks for their services. On the contrary, they were widely reviled as pariahs. Why was that?
The most fertile soil for such financial seeds proved to be the Italian city states. Fibonacci’s home town of Pisa was one. But it was above all Venice – more exposed than any of the others to Oriental influences – that became the great money-lending laboratory… and the home of literature’s most notorious moneylender – Shylock, in William Shakespeare’s The Merchant of Venice.
With any loan, things can go wrong. Ships can sink. And that is precisely why anyone who lends money to a merchant – if only for the duration of an ocean voyage – needs to be compensated. We usually call the compensation “interest” – the amount paid to the lender over and above the sum lent or “principal”. Overseas trade of the sort that Venice depended on couldn’t operate without such transactions. And they remain the foundation of international trade to this day.
This is the entrance to the Jewish ghetto in Venice where Jews were obliged to live and indeed confined at night. Jews were tolerated in Venice, but for a reason. The key was that Jews could provide a service that Christian merchants were forbidden to do – they could charge interest on their loans. Fibonacci might have figured out the mathematics of lending, but it took Shylock to do the deal.
Now, there was good reason why merchants came here to the Jewish ghetto to borrow money. For Christians, what the Jews were doing, lending money at interest, was a sin.
The medieval Church’s laws against usury – charging interest on loans – were a major obstacle to the development of finance in Europe. After all, what God-fearing Christian merchant wished to risk the torments of Hell?
Jews, too, weren’t supposed to lend at interest. But there was a convenient get-out clause in the Old Testament book of Deuteronomy, chapter 23, you weren’t supposed to lend to your brother at interest, but to a stranger? Well, that was a different matter. In other words, a Jew couldn’t lend to a Jew, but he could lend to a Christian.
The price the Jews paid for performing this service was social exclusion. Hence the ghetto. And hence the centuries-long association between Jews and finance, one of the few forms of economic activity from which Jews were not once excluded.
This is Shettleston in the East End of Glasgow.
That someone is a loan shark. You give him your benefit card as security and he gives you a loan. On the day your benefit arrives, he gives you back the card and you go to the post office to get your money, repaying him the interest. it’s a modern version of Shylock’s business model. Usury is alive and well and living in Scotland.
He’s providing a service, but at a socially unacceptable price. So how did lenders learn to overcome this fundamental problem? If they were too generous, they didn’t make any money, but if they were too hard-nosed, borrowers would eventually default. The answer was to get bigger and more powerful. It was time to invent banks.
In 15th century Italy, the key financial service of providing credit moved out of the ghetto to become the legitimate preserve of banks. This transition was symbolised by the rise of one family – the Medici. With their ascent, credit came of age. Moneylending ceased to be disreputable. It became glorious – and the foundation of a new kind of power. The dazzling legacy of the Medici family’s power still surrounds you in Florence today.
Then came Giovanni di Bicci de’ Medici. It was his aim to make the Medici totally legitimate. Part of the secret of his success was an ingenious bit of creative accounting that got the Medici off the hook of the anti-usury laws. These ledgers of the Medici bank make it clear how important commercial bills for financing foreign trade were to the bank. True, the Church prohibited the collection of interest on loans. But there was nothing to prevent a shrewd trader from making money on transactions like these, which involved multiple currencies. There was no interest, and therefore no sin, simply a commission deducted for the conversion of one currency into another. If money was advanced to a particular trader for any length of time, the commission was that bit larger. In the same way, depositors who put their money in the Medici bank were given ‘discrezione’ to compensate them for risking their money. This was credit, in other words, but with the interest payments discreetly concealed. Now, for the first time, moneylending had evolved into banking.
Under Giovanni’s guidance, the Medici banking network extended from Florence, to Venice, to Rome. The scale and diversity of the Medici’s operations was the key to reducing the risks of moneylending, and therefore also the costs to borrowers. That’s the essential difference between loan sharks and banks – between Shylock and the Medici.
In 150 years, the Medici had transformed themselves from backstreet moneylenders to the most powerful financial force in Europe.
Others had tried before, but the Medici were the first bankers to hit the political big time. And they did it by learning one crucial lesson – in finance, small is seldom beautiful. By making their bank bigger and more diversified, the Medici had found a way of spreading their risks. And by focusing on currency trading rather than just lending, they’d reduced their exposure to defaults by borrowers.
crucial part in that transformation has been played by the spread of modern banking from its Italian birthplace to a country where money has increasingly taken the form of easy credit. The United States has been built on borrowed money. But whereas the Medici tended to lend only to the relatively well off, until the present credit crunch at least, American banks seemed willing to give just about anyone a loan.
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