[CTRL] [1] Banking - Markets, Merchants and Princes

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 -Caveat Lector-

an excerpt from:
Banking - An Illustrated History
Edwin Green©1989
Phaidon Press Limited©1989
Rizzoli International Publications, Inc
300 Park Avenue South
New York, NY 10010
ISBN 0-8474-1072-0
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CHAPTER ONE

MARKETS, MERCHANTS AND
PRINCES

Banking from the earliest times to the 16th century

The origins of banking can hardly be pinned down to a precise period or place.
In the ancient world coinage, exchange, and lending were treated in a way
which had many recognizable features of banking business. From the late
twelfth century to the mid-fourteenth century the merchant communities of
Italy developed techniques and specializations which are still in the banker's
toolbox. The banks of the Renaissance and early modern period are strong
contenders as the earliest banking 'institutions' in a modern sense, while the
nineteenth century could lay claim to the beginnings of fully professional
banking. It may even be said that it was not until the very recent past —
especially from the 1960s to the early 1980s — that banking emerged as a
'universal' business in terms of the sheer scale and scope of its modern
operations.

The vocabulary of banking gives some clues to the origins of the business. The
modern term 'bank' derives from the merchant's bench, or banco, in the
marketplaces of medieval Italy. Traders in Lombardy preferred to set up their
own dealing benches rather than permanent stalls or shops, but this homely
style was not peculiar to money-dealers. Indeed, the 'bench' translation is
more useful in tracing the origins of the concept of bankruptcy: the breaking
of a merchant's bench in medieval Italy was the signal of his failure. Less
literally but more relevantly the words 'bank', banco and the German banck
were synonymous with the Italian  monte. Meaning a mound or accumulation, the
term was used to describe public loans in Venice as early as the twelfth
century, and by the fourteenth century the charity loan banks of Italy were
known as monti di pieta. These public loans and loan banks were no more than a
part of the Italian banking scene, however. A clearer view of the origins of
banking only emerges by recognizing its continuing, persistent
characteristics.

Over the last century and more, definitions of banking have settled upon four
key characteristics. To be recognized as a bank by businessmen and lawyers, an
institution is expected to receive deposits of money from its customers; to
maintain current accounts for them; to provide advances in the form of loans
or overdrafts; and to manage payments on behalf of its customers by collecting
and paying cheques, bills and other forms of 'banking currency'. In each of
these functions a bank is also required to offer security and safe-keeping. As
part of that security, a bank must show that its operations enjoy privacy —
that banking is not the servant of any other business which it may have taken
on. The price of its services will normally be set by the rates of interest,
commission, or fees which it charges its customers. These features are common
to all categories of banks on the modern financial scene, whether they are
'central' banks with governments as their main customers, commercial and
savings banks with their millions of private customers, or merchant banks with
their select lists of major accounts.

Some of these characteristics were evident in the ancient world. In
Mesopotamia lending was available at interest from temples, the royal
treasuries and private landowners as long ago as the third millenium BC. In
these transactions the lenders — for example the Egibi family of Babylon in
the first millenium BC — were deploying their own resources rather than
receiving and using others' deposits.

In Greece, even before the appearance of coinage in the seventh century BC,
the sanctuary at Delphi was used as a storehouse for bullion and valuables. A
similar refuge was created at the temple of Apollo at Didyma near Miletus
after the invasions of the Dorians, and later at Olympia. The Athenian
economy, developing strongly in the sixth and fifth centuries BC, also
produced prototype bankers — individual merchants who would accept deposits of
coin and bullion for safe custody, paying out a rate of interest agreed by
contract. The attractions of interest income were sufficiently great for
Xenophon (c.430—c.356 BC) to propose the formation of a safe-custody
institution in which all Athenians could share the profits from interest. This
dream, though not realized, foreshadowed mutual and jointstock ownership of
banks.

. Elsewhere in the Mediterranean world, the money-changers in the temple of
Jerusalem were described in the New Testament as exchanging coins for visiting
merchants and also allowing interest on any money deposited with them. In
republican and imperial Rome, in contrast to the Greeks' concern with safe-
keeping, the emphasis fell upon improving methods of payment. In the second
and first centuries BC the State and the patricians of Rome were using money-
shops, tabernae argentariae or mensae numulariae, to deal with tax payments
and to settle accounts with their creditors. An assignment or attributio could
be used as an order to a money-shop to settle payments, in similar fashion to
a draft or cheque. The dealers, or argentarii, also allowed interest on money
lodged, and provided a money-changing service. For the less wealthy citizens
of Rome, rudimentary loan banks used the proceeds of property confiscated from
criminals to lend money at interest.

It was not until the twelfth and thirteenth centuries, in an Italy of revival
and change, that the themes of banking history made a reappearance. On the
surface the economic and cultural environment throughout Europe was hostile.
The medieval economy remained land-based, dominated by the needs of Church and
State. Wealth and income were largely committed to the support of the
hierarchical, immobile structure of feudalism in which money, capital and
credit played a secondary role to barter and the payment of dues 'in kind'. At
the same time the Church was severe in its condemnation of the sin of usury,
or 'making money with money'. However, even in the Dark Ages, Jewish merchants
had kept alive the trading contacts between the Christian West and the Moslem
East, and from the late eleventh to the mid-thirteenth century international
trade was given real impetus by the crusades. In return for their financial
and military support, the Italian cities of Venice, Genoa and Pisa won
privileges throughout the reconquered eastern Mediterranean. The concessions
included markets, warehouses and merchant 'quarters' in Constantinople and in
the cities of the Egyptian and Levant coasts. The inflow of wealth to Italy
brought strong economic growth not only to the great maritime powers but also
to the cities inland — Lucca, Siena and Florence in the case of Pisa, Milan
and Piacenza in the case of Genoa, and the towns of the Po valley in that of
Venice.

The events of this period did not produce a banking tradition by accident or
magic. Their real importance in financial history was the creation of
customers for banking services. On one hand, the kings and princes of
Christian Europe could not tackle their crusading adventures without external,
international financing, and Italian merchants, especially the Genoese,
responded to the challenge with shipments of coin and bullion to the Holy Land
in return for credits with the royal treasuries of Europe. In contrast, the
wealth sucked into the Italian cities in the age of the crusades itself
generated civic and business demands for banking services. In Venice, by the
thirteenth century, the international entanglements of the government created
a large public debt, financed by its citizens. These creditors 'incorporated'
their claims, which enabled citizens to settle their own debts and payments by
transferring back and forth their holdings in the public debt.

The business demand for banking services was both stronger and more widely
spread than the needs of city-states. In late twelfth-century Genoa, the term
bancherius was being used to describe money-changers who took deposits and
gave credit to local business customers. Similarly in thirteenth-century
Venice the banchi di scritta transferred payments and accepted deposits from
their clients. Italian merchants were also international in their ambitions,
particularly in their attendance at the network of trading fairs in northern
Europe. From the twelfth century the fairs of Champagne were the most
prominent European market-place, serving initially as trade centres for the
cloth industries of Flanders and France. Six fairs were held each year — two
at Troyes, two at Provins, and one each at both Lagny and Bar-sur-Aube — and
they provided an almost continuous cycle of market activity. Merchants from
Milan were attending the fairs by the 1170s, soon followed by traders from
Piacenza and Lucca.

The special significance of the fairs for the Italian contingent was-their
role in the settlement of local and international debts. Each fair concluded
with a reckoning of debts incurred during the fair, and any debts or credits
not settled were carried forward to the next neighbouring fair. This new and
liberating system of credit was protected by safe conducts given by the counts
of Champagne; it enabled the Italian merchants to journey to and from the
north carrying only a bare minimum of coin specie. In the golden age of the
fairs, from the late twelfth century to the end of the thirteenth, the
'Lombards' and the merchants of Paris and Flanders were joined by merchants
and money-changers from Germany (especially Cologne), from Barcelona, Rome,
Toulouse and the Cahors region. Indeed the dealers of Cahors and Figeac were
important enough in the market to become notorious; by the late Middle Ages
the term cahorsin was synonymous with usury.

By the second half of the thirteenth century the interchange between northern
Italy and the fairs of Champagne was producing an identifiable banking
industry. Financial specialization was its main feature with private
enterprise rather than the demands of the state as its first concern. The
merchants from Piacenza and Tuscany who had originally visited the fairs to
buy cloth and sell alum and leather now travelled north purely to settle debts
and offer exchange to the commodity merchants. In this way the fairs became a
financial clearing-house as well as an international trade market. Banking
clearances, giro di partita, were used to settle complex payments negotiated
in other markets. So, for example, in 1257 a merchant from Lucca was able to
buy Chinese silk at Genoa, promising that a colleague based in Piacenza would
make the payment at the Champagne fairs.

These intermediaries were banking specialists, with their own style of
organization and their own techniques. The banking 'firm' or 'company' was
already emerging, made up of groups of associates and families who contributed
working capital and deposits of cash. Increasingly in the thirteenth century,
the heads of these firms remained at their Italian base-camps, leaving much of
their dealing and informationgathering at the fairs in the hands of agents.
This shift from travelling to 'sedentary' business became even more marked in
the next century, when banking firms moved on from agencies to more permanent
branch representation at home and overseas. The Bardi house of Florence, for
example, operated over thirty branches in Italy and overseas with more than
350 personnel. In the early fourteenth century their foreign branches were
found as far afield as London, Bruges, Spain, Moorish Africa, and the Levant.

Perhaps the most important technical contribution of these Italian banking
houses was their development of bills of exchange for settling payments,
particularly in the heavy trading between northern Italy and the fairs of
Champagne. Bills of exchange, a vital ingredient of modern banking history,
were developed from the 'letters of exchange' used by the Genoese in the late
twelfth and thirteenth centuries. In their fourteenth-century form, bills of
exchange were written promises to pay a named individual a fixed sum at a near
future date. Four individuals or firms participated in the transaction. First,
a merchant (A) wished to make a payment to a trader (B) in a distant town or
country. A local firm (AA) had an account with a firm (BB) in the relevant
town or country. At A's request, AA would therefore write an order (the bill
of exchange) to BB, authorizing payment from BB to B. In this fashion A would
pay, and B would collect from, their local banking firms.

Delays in the courier services of medieval Europe meant that such transactions
were temporary loans as well as payments. Interest could be charged indirectly
through the rate of exchange quoted in the bill, avoiding any implication of
usury. By the fourteenth century bills of this sort were beginning to serve as
the currency of specialist banking firms in western Europe. Their use as a
form of payment was to become even more widespread when, from the mid-
fifteenth century, merchants and bankers were prepared to trade in bills by
buying and selling them at discounted prices. This transition provided the
economy of the late medieval period with its own form of banking currency.
>From the mid-fourteenth century Italian merchants were also using a form of
negotiable cheque, the polizze, in which orders for payment could be made in
writing rather than in person.

If the Italian firms of the late thirteenth century were the first direct
ancestors of modern commercial banking, then the financial crises of the
fourteenth century deserve to be treated as the predecessors of banking crises
of the early modern period. Throughout the Middle Ages there was never any
shortage of financial failures, Expulsions of Jewish merchants and the
penalization of Lombard traders were almost endemic in thirteenth- and
fourteenth-century Europe, ensuring frequent mayhem in the pattern of credit
at home and abroad. There were also cases of business failure generated by
over-extension, as in the collapse of the house of Buonsignori of Sienna in
1295. More bankruptcies followed in Tuscany in the early fourteenth century.
In these cases the failures were local rather than generalized crises, but the
transition to widespread financial stress was not delayed for long. Towards
the middle of the fourteenth century Florentine houses such as the Bardi,
Peruzzi and Acciajoli were in the van of banking development, and their
customers included merchants and princes throughout Europe. By the 1330s and
1340s, however, they were committing vast sums in advances to King Edward III
of England; the total debt of nearly 1.5 million gold florins was said to be
'worth a kingdom'. Disastrously for the Italian bankers, the debt was created
in a territory that was still off the map of financial development. Worse
still, Edward III was also rearming at great expense for the campaigns in
France which led to the Hundred Years War. Default was inevitable, and the
Bardi, Peruzzi and Acciajoli were forced to suspend payments between 1339 and
1343.

The disruption of international finance was immense, reducing the credit of
merchants as well as princes. By any standard the suspension of the Florentine
firms was a major banking crisis, the first spectacular example of default on
a sovereign debt. It was also part of the much broader human and economic
crisis of the mid-fourteenth century; the arrival of the Black Death in 1347-8
threw most of western and northern Europe into deep shock. The devastation was
at its worst in city-ports such as Genoa (where the population of 65,000 was
reduced to less than 30,000), Hamburg and Bremen. The economic effects were
disastrous, not so much from the shortage of manpower as from the failure of
demand.

In spite of these very unpromising conditions, however, banking came into
fuller bloom. Florence, hit hard by the stoppage of its premier financial
houses, was a longterm victim of the plague. Yet by the early fifteenth
century the city could boast the best-designed banking facilities of the
premodern age. The twin themes of Florence's sophistication were the progress
of 'public' banking and the emergence of a formidable tradition of merchant
banking. The city of Venice had long ago set a precedent in bringing together
government creditors (see P. 13) and Florence itself had incorporated its
public debts into a Monte Communale in the thirteenth century. Although the
Monte Communale was at first a small affair, with assets of less than 50,000
florins in the early fourteenth century, the financial and demographic
disasters of the 1340S transformed its role. It now became a refuge of savings
for the surviving citizens, lifting total assets from 600,000 florins in the
early 1340s to 1.5 million florins in 1364 and 3 million florins by 1400. By
the turn of the century between 5,000 and 10,000 citizens were customers of
the Monte, receiving interest at 5 per cent and transferring holdings between
themselves in settlement of trade debts.

This forwardness in public banking was not unique to Florence. In the western
Mediterranean a taula, in effect a municipal savings bank providing exchange
and deposit services, was founded at Barcelona in 1401, and similar units were
established at Valencia (1408), Gerona and Saragossa. Genoa, never behind in
financial development, gave birth to the remarkable Casa di San Giorgio in
1407. As in Venice and Florence, the Casa brought together the State's
creditors in a single fund, and their subscriptions and deposits were
'tradable'. The contributing creditors, as proprietors, also had authority to
elect a board of eight directors. From 1408 until 1444 the Banca di San
Giorgio — subsidiary to the Casa — also accepted deposits and made loans to
officials and to private bankers.

If Florence was an example and a model in public banking, it was even more
obviously setting the pace in merchant banking. The Medici bank, Raymond
Goldsmith has claimed recently, was:

. . . 'technically the most advanced financial institution before the late
16th century and possibly the late 17th century and was definitely surpassed
in these respects only in the 19th century'.

The Medici family, originally from the Mugello region north of Florence, first
came to prominence in the city as merchants and office-holders in the late
thirteenth century. A century later they had become a major political and
trading clan, and in 1397 they established their own banking house. Under the
direction of Cosimo de Medici (1389-1464), the bank achieved real economic and
political distinction.

In many respects, Cosimo followed on from and developed the traditions of the
Bardi and Peruzzi (one sign of that continuity being his marriage to
Contessina Bardi of the old banking family). Like these predecessors and like
the other banking houses of Florence, the Medici placed great reliance upon a
network of information at home and abroad. Gregorio Dati, a contemporary of
Cosimo, observed that the Florentine bankers had 'spread their wings over the
world and have information from all its corners'. This network was partly
maintained through branch offices; the firm usually operated between six and
ten branches in major trading centres such as Venice, Naples, Geneva and
Lyons. While Cosimo and his family held the largest shares in these branches,
they were in fact self-standing partnerships, with local managers and
investors participating in the capital and profits.

To supplement the branches, the Medici also employed local agents and
correspondents throughout Europe, providing not only information but also an
international structure of credit. The Medici and their correspondents kept
accounts open in each others' names, enabling customers to make much greater
use of bills of exchange in the early fifteenth century. In 1427, for example,
the Medici houses at Florence, Rome and Venice were able to deploy over 62 per
cent of their assets in loans and over 20 per cent in accepting bills of
exchange from their correspondents. This was achieved on a relatively small
capital base and, unlike the Bardi and Peruzzi with perhaps ten times the
capital commitment, the Medici branches were not dependent upon large royal
loans for their earnings. In comparison with their fourteenth-century
counterparts, the Medici used their branch network to create a wide 'spread'
of business and risk.

The Medici's banking operations were not only ahead of their time in terms of
techniques and communications. Their buildings, too, were designed in a grand
fashion that reflected the family's political importance, 'pioneering the
notion that banking needed confident, even palatial surroundings. The Medici
palace in the Via Larga, Florence, was the centrepiece of this more
conspicuous style in the 1440s. Its architect, Michelozzo, was also
responsible -for the Medici bank in Milan in the 1460s, and his mixing of the
needs of business, fortress and palace was the ancestor of bank design down to
the twentieth century. Cosimo and his successors, Piero (1416-69) and Lorenzo
the Magnificent (1449-92), also emerged as patrons of the arts and letters on
a scale which even a modern sponsorship budget could not encompass. Cosimo's
extraordinary range of commissions included buildings by Brunelleschi as well
as Michelozzo, and he was the principal patron of the sculptor Donatello and
the artist Fra Filippo Lippi: Lorenzo also secured a key role in art history
as the first patron of Michelangelo and as an important buyer of work by both
Verrochio and Botticelli.

In the early fourteenth century the Medici's investments in buildings and in
art appear to have been 'off the balance sheet' — that is to say separate from
the conduct of banking and trading business. Towards mid-century, however, the
heads of the family were prone to mingle the costs of their political and
business activities. Lorenzo's enemies even accused him of raiding public
funds such as the Monte Communale and the Monte delle Doti, a dowry fund for
girls, to meet business losses. These appropriations were not proved, yet by
the 1470s and 1480s it was clear that the bank was at best in difficulty and
at worst in terminal decline. The Bruges branch failed soon after its biggest
customer, Duke Charles the Bold of Burgundy, was killed in 1477; Lorenzo was
also forced to wind up the London office after defaults by King Edward IV. At
Lyons a 'run' on the bank in 1483 added to the firm's distress. The Medici
continued to play a leading role in Italian affairs, producing politicians,
patrons and the two Medici popes Leo X and Clement VII, but as bankers their
ascendancy came to an end with the death of Lorenzo in 1492.

The house of Medici, precocious and colourful as it may have been, was not the
only example of bankers' increasing sophistication in the fifteenth century.
North of the Alps the meteoric rise of the merchant Jacques Coeur created a
major bank-type operation centred on his hotel at Bourges. Coeur was also a
trader, an owner of ships and galleys, and a manufacturer whose entangled
network of interests was instrumental in the revival of the Mediterranean
ports of France in the early fifteenth century. But Coeur became yet another
(and by no means the last) of the victims of sovereign lending. In 1451, soon
after he had given a huge loan to Louis XI of France to finance the reconquest
of Normandy from the English, Coeur was arrested and his fortune confiscated.

In contrast to the entrepreneurial, singlehanded banking ambitions of Jacques
Coeur, the Fugger family of Augsburg created a more durable financial dynasty.
Originally wool merchants, the Fuggers turned their interests in the fifteenth
century to mining and finance. Precious metals and banking were essential
allies in their success, since their gold, silver and copper mines in Hungary
and Austria emerged as suppliers to coin mints throughout Europe. Having won
the monopoly of silver production from the Schwaz mines in Tyrol in 1488, the
Fuggers then enjoyed the fruits of a boom in mining for precious metals.

Between the late fifteenth and the midsixteenth century this primacy turned
the house of Fugger into the most influential and celebrated source of finance
on the continent. Jacob Fugger the Rich (1459-1525) became the sole heir to
the family's mining and banking operations in 1510, and under his guidance the
house became the principal financier to the Habsburg empire in Germany, the
Low Countries and Spain. The apex of that power was reached in 1519 with the
election of the Habsburg Charles V as Holy Roman Emperor; loans from the
Fuggers were deployed on a massive scale to encourage the electors to vote for
Charles and against the rival claims of Francis I of France. The success of
this enterprise won the Fuggers the role of court bankers throughout the
Habsburg empire in the second quarter of the sixteenth century.

The Medici, the Fuggers, and rival houses such as the Pazzi of Florence and
the Chigi were the most spectacular banking ventures of the fifteenth and
early sixteenth centuries. Although in each case their ascendancy was based
upon earlier success as bankers in the world of private enterprise, this
prominence was achieved largely through their involvement with the finances of
princes and popes. Yet there existed also in fifteenth-century Italy banks
which catered for less conspicuous customers — new and unusual financial
institutions known as the monti di pieta. The function of these banks was to
lend small amounts of money at minimal interest to relieve suffering and
distress amongst the poor. Loans were for very modest sums, on the security of
pledges or pawns. Most of the funds were compiled from charitable donations,
although in some cases the monti paid interest on deposits and made loans to
the wealthy. The earliest monte di pieta opened in 1462 in Perugia — a city
with a strong tradition of money-dealing and bank-type operations — and
provided a model for nearly ninety monti throughout Italy fifty years later.

Amongst these establishments was the Monte Pio at Siena. The original unit was
a small monte di pieta with a capital of only 8,000 florins drawn from the
city's funds. There was a maximum of 8 florins for any one loan. After its
closure in 1511 a new Monte Pio was formed in 1569, and in 1625 control passed
to the newly-created Monte dei Paschi di Siena, a much larger enterprise with
facilities for lending without security and for making grants towards public
works projects. Originally described as a monte non vacabile — a banking
institution which was not to be given up — its capital was guaranteed by the
Medici rulers of Siena. Fittingly the non vacabile Monte dei Paschi di Siena
has outlived its guarantors by more than 250 years.

In the long-term development of banking, the monti di pieta and their variants
elsewhere (the huis van leening which opened in Amsterdam in 1614, for
example) made real progress in filtering credit through to the poor and to the
artisans and small traders of urban Europe. Nevertheless, the technical
advance of banking remained in the hands of those private firms which could
survive in international trade and finance. By the sixteenth century, after
the long economic stagnation of the late Middle Ages, these firms were
operating in very different and very challenging conditions. Population growth
and the drain of wealth along the new trade routes to the Middle East and Far
East increased the demand for coinage and bullion, and despite the huge intake
of gold and silver from the Americas (an average of over 110 tons of silver
reached Spain each year between 1500 and 1650), this ferment of demand created
scarcities of coin throughout the sixteenth century. Such stress in the
international economy created all manner of inflationary pressures and trade
imbalances and, in the development of banking, these challenges also forced a
massive expansion in credit. If coins and bullion were in short supply, then
alternative 'bank' currencies could fill the gap. The range of credit
techniques was not much changed since the fourteenth century, but bills of
exchange and other forms of credit payment were much more widely accepted and
traded in the sixteenth century.

Western Europe's international fairs, which had been so important to financial
development in the thirteenth century, continued to flourish and were vital to
this expansion of credit three centuries later. In the early part of the
sixteenth century the Lyons fairs were especially prominent in the settlement
of trade payments; there were as many as 169 banking businesses in the city,
of which 143 were Italian. These firms used Lyons as their base for the
finance of the silk and spice trades, and the close links between the fairs at
Lyons and Medina del Campo in Spain were also essential to the inflow of
silver in the first half of the century. As many as 2,000 merchants were
attending the fairs at Medina in the mid-sixteenth century, and were in
residence for at least one quarter of each year.

Nevertheless, the informal market was giving way to a more formal and
institutional approach. Cities such as Antwerp (1531), London (1571) and
Seville (1583) established their own Bourse or Exchange to act as permanent
markets for traders and brokers. Meanwhile the Italians altered both the
location and the scope of the traditional fairs. In 1575 the major Genoese
firms (whose government was now in alliance with Charles V) pulled out of
Lyons and established their own fair at Besancon, in Hapsburg territory.

There was technical as well as political significance in the Genoese firms'
evacuation to Besancon. The Italians were now specialists in foreign exchange,
bankers rather than merchants. In 1550, for example, one French commentator
found it extraordinary that the Italians would travel to the fairs empty-
handed, and without ... ... anything besides their persons, with a little
credit,- a pen, ink and paper, and skill in handling, turning and diverting
the exchanges from one country to another, according to the information they
have of the places where money is dearest.

>From the middle of the century the Genoese were moving into a 'golden age' of
banking and finance. In 1579 they transplanted their four-times-yearly fairs
from Besancon, via Poligny and Chambery to their own Genoan city of Piacenza.
Throughout these wanderings the markets kept their title of 'Besancon fairs'.
Between fifty and sixty banking firms, banchieri di conto, controlled dealings
at the fairs with perhaps twice as many trading firms in attendance to settle
their international transactions. Each representative would bring to Piacenza
the scartafaccio or bill book of his firm and would settle outstanding debts
or payments before the end of each fair. These clearing operations also meant
that the Besancon fairs saw relatively few deals in cash or bullion while
millions of scudi were either paid by credit or rolled forward to the next
fair.

The liberation of credit payments, particularly through the Genoese firms, had
a double significance. Firstly, the financial and business community began to
enjoy the benefits of lower interest rates as the expanding opportunities for
'clearing' payments, combined with less hostile attitudes to interest charges
after the Reformation, drove down the price of borrowing in the later
sixteenth century. Secondly, the preeminence of the Genoese bankers in the
later sixteenth century altered the balance of sovereign debt in Europe. The
Habsburg empire of Charles V was by far the largest of the royal borrowers,
and in the first part of the century its banking needs continued to be
supplied by the Fuggers and their associates the Welser and Hochstatter banks
of Augsburg. By mid-century, however, Charles V and his heir Philip II of
Spain were faced with political and religious challenges throughout Europe.
The drain on imperial resources led, in 1557, to Philip's declaration of
bankruptcy, in the aftermath of which the Fuggers and their banking allies
could no longer sustain their lending. In their place Genoese bankers such as
the Grimaldi and Gentile provided new loans to Philip — usually with 'penalty'
interest clauses, and complex conditions for payments and bullion shipments
between Spain and the Genoese agents in Italy and Flanders.

The management of payments to Flanders was especially important to Philip 11,
as the war in the Low Countries demanded vast sums for army pay and
provisions. Spain, France and England were all embroiled in the war after 1572
and in each case their war finances needed the intermediation of the Italian
and German bankers.

In the Spanish case, the Genoese banks were transmitting an annual average Of
5.5 million florins to the Netherlands between 1561 and 1610 Three times that
amount was transmitted in the pre-Armada year of 1587, mostly by bill of
exchange. Whenever the Genoese bankers' domination was challenged, their
payments system proved remarkably effective and durable. In 1575, for example,
Philip struck back at his bankers by annulling all loan agreements since 1560,
believing over-optimistically that the Fuggers and Spanish merchant bankers
such as the Ruiz and Espinosa could take the Italians' place. The Genoese
bankers responded by blocking payments of gold and bills of exchange to
Flanders. So successful was this manoeuvre that the unpaid Spanish army in
Flanders mutinied and sacked Antwerp in 1576. Philip had little choice but to
negotiate with the Italians and reinstall them as his bankers in 1577.

Throughout the sixteenth century bankers such as the Fuggers and the Genoese
played an essentially entrepreneurial role in public finance. Their banking
services relied upon their flexibility as private firms, their familiarity
with the international fairs, and the relative efficiency of their payments
between European centres of trade. But perhaps the most striking feature of
this entrepreneurial style of public lending was the fragility of sources of
funds. Ironically, at a time when the techniques of payment were more widely
used, the numbers of banking units in Europe were still falling. In Florence,
where there had been eighty firms in banking before the Black Death, only
eight banks remained at the beginning of the sixteenth century. Similarly, in
1585 it was estimated that ninety-six of the one hundred and three private
banks founded in Venice to date had closed or failed. Bank failures continued
into the second half of the sixteenth century, narrowing the sources of credit
into the hands of the larger firms.

Mismanagement, an often hostile cultural environment, and the effects of
severe inflation all increased the vulnerability of private banking firms. For
the largest firms — those who had made the transition from international
banking to public finance — the greatest danger was still the volatile nature
of European politics. The Genoese bankers at the court of Spain were masters
in terms of capital resources and techniques, yet in 1575 they had faced
failure both in Spain and in their own city. After their return as Philip II's
bankers they were severely tested by further state bankruptcies in 1596 and
1607. It was political opposition which would eventually drive them from the
seat of power in Spain in 1627.

This vulnerability of bankers to sovereign debts had been a constant theme of
the early development of banking since the fourteenth century. The Florentine
dynasties, the Fuggers and the Genoese bankers all suffered eventually from
their status as private or family businesses. At a time when the demands of
state finance were increasing at a tremendous rate, the numbers and resources
of private bankers could not keep pace indefinitely. Stability and larger
resources could only come from a more permanent, institutional approach to
public finance. It was this clarification of public and private finance that
dominated the next phases of banking development.

pps. 11-29
-----
Aloha, He'Ping,
Om, Shalom, Salaam.
Em Hotep, Peace Be,
Omnia Bona Bonis,
All My Relations.
Adieu, Adios, Aloha.
Amen.
Roads End
Kris

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