Lend the money, go to hell? How the Medici family bypassed Christian ban on interest to make money by establishing the bill of exchange in 14th century Florence
Damn it. Now I have overdrawn my current account. I completely forgot about that credit card billing. Oh well, not exactly the good news of the day but also not a major problem. If I lived in the Middle Ages, however, I would be in trouble now. Not wanting to gamble with salvation, no good Christian would have lent me money with interest .... Ursula Kampmann tells what happened next.
how the bill of exchange got its name
Damn it. Now I have overdrawn my current account. I completely forgot about that credit card billing. Oh well, not exactly the good news of the day but also not a major problem. If I lived in the Middle Ages, however, I would be in trouble now. Not wanting to gamble with salvation, no good Christian would have lent me money with interest.
Interest equalled usury. And usury was a cardinal sin. Those who sinned would eternally burn in hell, the bag crammed with money still around the neck.
Nonetheless even in the Middle Ages people needed money.
This was particularly true for merchants. They would often make large advance payments and then be left waiting for their money because customers were taking their time to settle the bill. Merchants absolutely needed credit, no question.
Of course even in the Middle Ages there were people with too much money willing to lend this money against interest as long as that did not put their chance of redemption at risk. And with the help of theologians and lawyers they found a loophole to avoid conflicts with law and religion. The loophole was called bill of exchange.
In his book “Medici Money”, Tim Parks explains how the bill of exchange worked in everyday life.
Let’s imagine we’re in 14th century Florence. I am an internationally active merchant and in dire need of 1,000 florins. 1,000 florins are a lot of money. Enough to build a small palace in Florence. Or to buy 400 cubits of Damask.
So let’s go to the financial district, that of the banks and money changers, to Orsanmichele. On our way we see the small shops of the pawnbrokers with their red buntings. They indicate that these are places where you can pawn items for a loan, although the loans will never exceed a certain amount of money. Working here means forfeiting salvation. Even the town does not raise taxes in this district. It wants no connection with the sinful business. Still keen on the money, it relabels taxes into a punitive fine, 2,000 florins to be paid annually.
Now we are passing by the tables of the banche a minuto, the local banks, draped in green cloth. The tables are laden with heaps of coins. If you want to change money, buy jewellery, or invest money, this is the place to go. Of course we would not get interest on our investment. Instead the banker would give us a present once a year. A gift of money, of course. If we didn’t think it appropriate, we would take our money out of that bank and to a different one.
But the kind of money we need we won’t find here. We need to keep going for a little bit. Until the street corner Via Porta Rossa and Via dell’Arte della Lana. Where the bank of the Medici is. Of course we won’t actually get a credit there, but we can get a bill of exchange.
The Medici did not want to risk salvation any more than everyone else. So instead of offering us credit, they offers us a bill of exchange. Right here and now I am going to buy 1,000 florins at the price of 40 English pence for each florin, payable in London. For the bank that’s a good deal. So I write a bill of exchange. More precisely I write down a message for my associate in London: Anno Domini 1417, June 15, Florence, 1,000 florins. As customary paying 1,000 florins at the price of 40 pence each to the attorney of Giovanni de‘ Medici and his partners in London. God bless you.
I receive my 1,000 florins, the Medici their bill of exchange. They leave it in the hands of a messenger on the way to London. The Medici’s attorney in London will then present the bill of exchange to my business partner, who will pay out the sum in pounds and pence exactly 90 days later. So on September 13 the Medici in London receive 40,000 pence. Their local agent will then find a customer in London desiring to engage in the reverse transaction. Someone wanting to borrow English pounds and willing to pay back in florins. I am sure he will find one. And this is where the profit is generated because the pound is cheaper in London than in Florence.
Our London agent will write a bill of exchange over 40,000 pence in florins but for 36 florins per pound, not 40. So after 180 days the Medici receive 1,111 florins for their initial 1,000 florins and have made about 11 % profit in 6 months.
The root of the matter was the fact that exchange rates were fluctuating. In theory you could also take a loss. What were the chances? Well, we have complete and documented proof over 67 bills of exchange from the Medici. Not once did they take a loss.
Still theologians did not recognise this business as a loan with interest but as a currency exchange. And to that the Church had no objections whatsoever.
Oh yeah, speaking of which: Did you know how the Medici became so rich?
They were trusted with looking after the Papal assets and steadily increased them to their owner’s satisfaction, above all with bill of exchange transactions.
The moral of this story? Don’t get worked up about the high interest on your bank overdraft. You won’t go to hell for it, no one does. Even the Catholic Church lifted the ban on interest taking in the 17th century.