December 6th 2008


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Articles from this issue:

COVER STORY: Opposition tensions to resurface in 2009?

EDITORIAL: Left-liberals to dominate Obama Administration

GLOBAL FINANCIAL CRISIS: Disentangling the new world disorder

SUPERMARKETS: GroceryWatch is a white elephant

POLITICAL IDEAS: The realisable goal of property for all

STRAWS IN THE WIND: Giving to the have-mores / How long can Labor last? / Degraded educational standards / Future prospects

BANKING: The Medici — manipulators of money and soft power

REPRODUCTIVE HEALTH: Abortion increases risk of pre-term births

EUGENICS: The menace of eugenics, yesterday and today

MARRIAGE: US battle to preserve traditional marriage

CINEMA: Depraved film the symptom of a sick culture - the Coen Brothers' Burn After Reading

Australian Christian Lobby responds (letter)

Chechen terrorists (letter)

BOOKS: WARSAW 1920: Lenin's Failed Conquest of Europe, by Adam Zamoyski

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BANKING:
The Medici — manipulators of money and soft power


by Jeffry Babb

News Weekly, December 6, 2008
In 2004, Joseph Nye coined the term "soft power" to describe how states can often get what they want, not just through the exercise of "hard" military power and coercion, but through diplomacy, economic assistance and cultural exchanges with other countries.

The term soft power may be relatively new, but the concept isn't. As Jeffry Babb shows, it was well understood and practised centuries ago by the famous Medici dynasty of Renaissance Florence.

No better illustration of soft power exists than the way power was exercised by the rich, mercantile dynasty of Renaissance Florence, the Medici. Indeed, the Renaissance, without much exaggeration, could be viewed as the most successful public relations campaign in history.

Florence was the centre of the Renaissance and not by coincidence; it was the centre of European banking. And at the centre of Florentine banking sat the Medici.

And it was the nature of Florence itself that made soft power so important to the Medici. Although "Italy" was a concept, modern Italy was not united until late in the 19th century.

In the 15th century, Italy was broken up into a plethora of small states, of which five stood out above the others — Florence, Milan, Venice, Naples and the Papal States. The alliances they formed were constantly shifting, as was their territory.

The only true republic was Florence. Venice was in theory a republic, but the Doge was elected for life and thus became a de facto monarch. Florence was effectively ruled by the great merchant families, among whom the Medici were pre-eminent.

The Medici could lose power at any time and were expelled from Florence several times, most notably in 1494 by the fiery Dominican preacher, Savonarola. They maintained their power by being the greatest patrons of the arts in the Italian intellectual revolution that was conscious, even then, of being a re-birth of learning.

The power of the Medici came from banking. The family bank was the most powerful financial institution of the 15th century, and at one time was the most profitable family company in Europe. Florence was the New York of its era. Italian bankers dominated European finance. These financiers were known collectively, and inaccurately, as Lombards.

What the Medici did was not new. The great Italian banking families of the 14th century, the Bardi and the Peruzzi, had been immensely rich, until they were felled by bad loans, notably to King Edward III of England. But the Medici were the most international of the Italian bankers.

In the Middle Ages, usury was a crime condemned by the Church. "Usury" was defined as lending money at interest. However, financers were needed then, as they are today, to lubricate the economy. Rulers demanded credit to finance their military campaigns and to fund their princely lifestyles.

How did the Medici, who supplied four Popes and two queens of France, accumulate their power and wealth, if they could not charge interest? The answer is trade. The Medici, like modern bankers, held deposits and made loans.

But the main source of profit lay in trade finance — changing money and issuing bills of exchange. By changing money and issuing letters of credit, they could build in an interest rate that wasn't really an interest rate, making a crucial distinction between "usury" and "legitimate profit" that the theologians of the day found acceptable. Similar distinctions are made today in the booming Islamic banking industry.

Trade was developing as an engine of economic growth in the 15th century. Fine clothing, silk, spices and notably alum, a mineral essential to the textile industry to fix dyes and prepare wool for weaving, flowed north from Italy and the Mediterranean.

The most notable export flowing south was wool from England, which the factories of Florence processed. The trouble was that there was a trade imbalance. More goods went north than went south and the English, the wool OPEC of the day, tried to process the wool at home, further straining the trade.

This meant that the Medici had a problem balancing their books. This imbalance and bad loans, combined with bad management, eventually destroyed the primacy of the Medici.

But the best customer the Medici had was the Church. The Medici used their network of European branches to bring the tithes and taxes due to the papacy to Rome from the Church Commercial.

The Economist magazine commented: "So successful was the bank under Cosimo de' Medici, who ruled it with an iron rod, the Medici were for a long while put in charge of papal finances. Until 1434, more than half of the bank's revenues came from its Rome 'branch' (which followed the Pope around on his travels).

"Its connections with Rome and the Vatican's reliance on it gave the bank immense clout with other customers and with the Church itself. On one occasion, the records show, the bank got the elevation of a cleric to a bishopric delayed until his father, a cardinal (yes), had repaid his own and his son's debts." (The Economist, December 23, 1999).

Historians have been blessed by the fact that the Medici kept excellent records. Whole books have been written detailing the history of the Medici bank. What was the secret that allowed the Medici to gain such wealth and influence?

The first element was commercial; the second was the masterly use of soft power.

The Medici were not major innovators, but they were skilled at adapting the financial techniques which had been, or were being, developed in Italy at the time, such as double-entry book-keeping, bills of exchange and book transfers. One innovation the Medici seem to have developed and perfected was the holding company. Each of its branches was a partnership, so the main bank did not have unlimited liability for the debts of the branches. The end of this arrangement in 1455 was one of the factors leading to the eventual demise of the bank.

What set the Medici bank apart was its international reach. With nine branches at its peak and many correspondent banks, it was a truly multinational organisation, serving the greatest multinational entity of the day, the Church. Its greatest commercial asset was its ability to act on a multinational scale.

When international trade or the economy suffered, or in times of epidemic or war, its business suffered too. This gave the bank an interest in maintaining peace, but in order to gain business, it funded the wars of Europe's monarchs. "Sovereign risk" in early modern Europe was high and frequently banks were destroyed when governments defaulted.

The Economist added: "Set up in 1397 by Giovanni di Bicci de' Medici, who had managed a bank in Rome before moving to Florence, the Medici bank lasted until 1494, when it collapsed, a victim of depression, internal strife and French aggression. Until its declining days, the power it wielded within Europe foreshadowed that wielded by the Rothschilds 400 years later."

The end of the bank was not the end of the Medici. Their power in Florence spanned almost 400 years. The later Medici were dukes and hereditary rulers but had neither the immense wealth nor international power of their commoner forebears, who constantly had to scheme and conspire to maintain their supremacy in the fractious republic.

The second element in Medici rule was soft power. The revival of classical learning created a space for artists and authors to explore new concepts and morality. Aristotle had long been incorporated into Christian theology but the revival of Plato's philosophy was to stimulate whole new areas of philosophic speculation.

The Medici family was able to gain great kudos and fame by arranging the transfer to Florence of the Great Council intended to heal the Schism between Western and Eastern Christianity, which had been convened in Ferrara in 1438. The Eastern Emperor, accompanied by the Patriarch of Constantinople and a concourse of theologians, bishops, interpreters and scholars some 700-strong, once in Florence proved to be a great stimulus to learning and the teaching of Greek, which allowed scholars to access the ancient texts in their original language.

The Medicis were also famous collectors of ancient texts from all over Europe and Asia, greatly enhancing the lustre of their library and consequently their reputation as patrons of the new learning.

What the new learning did was create a space for discourse without direct reference to traditional Christianity. Thus, ethics, morality and political philosophy could be taken into a secular realm. As for healing the split between East and West, an agreement was reached in Florence but foundered on the theology of the Holy Spirit. Just 14 years later, Constantinople fell to the Turks after centuries of resistance to Islam.

The luminaries for whom the Medici acted as patron is a roll-call of the great artists of the Renaissance — Michelangelo, Leonardo da Vinci, Donatello and Botticelli, among others. Once again, the visual artists began by interpreting the ancient texts and reinterpreting the symbols of Christianity. The end result was the development of a more secular society.

The Medici were generous donors to the Church, and if Lorenzo the Magnificent was recognisable in Botticelli's "The Adoration of the Magi", it was only his due.

Bankers of the Renaissance, as now, were dealers in patronage and advice. If they had not been, they could not have remained in business; but along with others then and since, they learned that putting their trust in princes was a recipe for disaster.

But in their skilful blending of money and culture, the Medici taught us that power does not come only from the barrel of a gun.




























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