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Medici banking innovations we still use today

The Medici family are synonymous with the generous patronage of art and architecture during the Italian Renaissance. Florence was the hub of this great cultural revolution, and it’s no coincidence that this was also the city where Giovanni de’ Medici opened the first of the family banks in 1397.

It was the Medici’s shrewd and meticulous banking practices that helped them generate the enormous wealth that Cosimo, and later Lorenzo ‘the Magnificent’ Medici would use to sponsor the greatest artists of their time.

Over the course of one hundred years, the Medici banking dynasty grew into the largest the world had seen, with branches in Barcelona, Bruges, and beyond, laying the foundations of banking and finance as we know it today. Here, we take a look at some of the innovations this illustrious bloodline popularised in their heyday, which have stood the test of time.

Double-entry bookkeeping

The invention of double-entry bookkeeping can be traced to slightly before Giovanni de Medici’s time, but it was the family who first popularised its use in their banks. The Medici banks needed a more accurate way of keeping the books and minimising errors due to the influx of wealth generated from traders of the period. The mercantile class was booming- weaving across Europe, the Mediterranean, and the Silk Road trading expensive goods such as silk, cloth and spices.

The method of double-entry bookkeeping works on the equation that ‘Assets = Liabilities + Equity’. It meant recording both credits and debits, for an easier overview of what money the business has, and where. It helped bankers and merchants keep a more accurate account of their financial decisions- and was a simple yet hugely effective trick which helped the Medici build their reputation for reliability. Today, nearly all businesses use the double-entry bookkeeping method of accounting. For this, we thank the Medici.

Letter of credit

A letter of credit was one of the most important financial mechanisms that allowed international trade to flourish in the 15th century. As caravans wheeled, and ships sailed around Europe distributing fine goods, the letter of credit became a necessity for travelling merchants.

A letter of credit is an agreement in which the buyer’s bank guarantees to pay the seller’s bank at the time goods/services are delivered. They would be authorised to receive pounds in the London branch, for example, at 40 pence to the florin exactly 90 days after (the timing was always fixed).

Shipping large sums of money over land on a regular basis was too dangerous during this era. For this reason, traders would deposit florins (the Florentine currency of the day) in a Medici bank for a letter of credit.

Herein this tidy little innovation also lay the genius of the Medici wealth-generating machine. During the early Middle Ages, usury (the lending of money for interest) was a cardinal sin- which posed a problem for banking institutions such as the Medicis in a religiously-zealous society. A letter of credit was one of many ways they could disguise the interest within transactions, and refrain from angering the theocracy.

Continuing our example from above, the London branch of the bank would then turn around and find someone wanting to purchase florins in Florence, but at the rate of 36 pence to a florin (currencies traded in different rates home and away). This little difference of 4 pence per florin gave the cunning Medicis a 22% annual return. In the eyes of the contemporary theologian, this was a currency exchange rather than a sin, absolving them of the judgment of God, whilst making a tidy profit.

Holding companies

Not strictly a banking innovation, but the Medici family introduced the first model of a modern holding company, the stronghold upon which their European dominance of power lay on. By the time their banking dynasty began to crumble at the end of the 15th century, they had expanded their network to branches across Milan, Venice, Rome, London, Geneva, Lyon, Avignon, Barcelona, and Bruges.

Each of its branches was a partnership, held under the central holding company in Florence. This helped them develop the innovations of letters of credit and bills of exchange, hold deposits, make loans and solidified their presence and trust across Europe, as global banks do today. The Medici’s lust for prosperity, power, and patronage forced them to innovate methods that facilitated the booming merchant class of the time, whilst staying on the right side of God.

If you’d like to enhance your understanding of banking and finance for exciting career prospects, apply now for an MBA in Banking and Finance.

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