Marcello Simonetta 10.31.08, 12:01 AM ET
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In these times of financial woe, some journalists have been timidly exploring the past for precedents, pushing the horizon as far as the 1929 Great Depression. Very few have looked beyond that traumatic event, assuming that capitalism in its current form has no earlier historical roots. But this is hardly true--earlier history might indeed teach us valuable lessons.
Raymond De Roover, a Harvard historian, published in 1963 his classic The Rise and Decline of the Medici Bank (1397-1494), which opens with the statement that "modern capitalism based on private ownership" was invented by Italian merchants and bankers, by far the most active businessmen in the Middle Ages. Joint stock companies did not exist until the 1600s, "but the Medici Bank had foreshadowed the holding companies in certain respects."
In its heyday, the Florentine banking conglomerate was the largest in Europe. It had branches in Geneva, Avignon, Bruges and London as well as in Rome, Naples, Venice and Milan. Founded in 1397 by Giovanni di Bicci, the bank's fortune reached its peak under the wise management of Cosimo de' Medici, the famous patron of the arts.
The expansion of the banking activities continued at an extraordinary pace until his death in 1464. Gold and cash deposits along with commercial ventures and merchandise exchanges guaranteed a continuous flow for high-interest lending, which was wisely supervised. But the Bank soon began to overstretch itself.
Now, as then, the coordination between different branches or departments continues to be a major issue confronting administrators in business as well as in governments. Choosing the right person as a manager is no less difficult than finding the right heir to the business or the reign.
After Cosimo's death, his son, Piero, and his grandson, Lorenzo, had a much less steady hand on the branch managers and gradually lost their grip on the banking empire. Diminished economic power brought about troubles at home, where in 1478 the so-called Pazzi Conspiracy--an attempted coup organized by a rival banking family secretly helped by the Roman Catholic Church--brought Lorenzo to his knees.
By the time Cosimo's grandson tried to recover control over Florence, the Medici Bank was near collapse, which led to many irregularities. One disgruntled citizen commented after a two-year bout of warfare: "Cosimo and Piero (grandfather and father), with half of the money you have spent on this war, would have gained much more than you have lost."
This might remind us of other recent disastrous military and monetary enterprises. Then, as now, too much money badly accounted often damages the purpose for which it is spent. Lorenzo, desperately in need for monies, turned business into a matter of state and took money from his own relatives to defend himself and the city, and also diverted public funds for his own use.
The fear of being annihilated by foreign powers, combined with the lack of transparency, allowed the ruler of the Republic to turn it into an effective tyranny. With the declared purpose of defending Florentine freedom and its way of life, Lorenzo raised taxes for the war and embezzled banking funds with the result (does this sound familiar, anyone?) of creating a huge credit crunch.
The Medici Bank--as De Roover argued--had tenuous cash reserves that were usually well below 10% of total assets. Lack of liquidity was an issue for banking since its origins. Of course, in the Renaissance they dealt with thousands or millions of florins--billions were yet unthinkable. But would a bailout have been thinkable at the time? Lorenzo certainly bailed himself and his family out of a political and financial mess with public funds. He eventually gained for himself the superlative epithet of "The Magnificent" by obtaining foreign military support and by compromising his city's liberty.
However, shortly after his death in 1492, his weak son Piero was thrown out of Florence. Perhaps that was an early instance of what we would now call kicking the debt problem onto the next generation.
State and money matters have always been deeply intertwined--the idea that the market would regulate itself rose no sooner than the 18th century with Adam Smith's "invisible hand." We can learn from the past that people on the top were always keen on hiding and washing their hands while appropriating funds in the name of the country, sharing the debts with people at the bottom and privatizing the profits.
The enlightened policies of public artistic patronage like those of Cosimo and Lorenzo were a magnificent facade for their political success and survival--and ultimately for their financial failure.
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