Historical Context for Financial Crises: The Medici and Their Bank

On November 9, 2009, I was invited to give a lecture at the University of New York in Prague by Professor Charles Webel who is teaching a class on Ethics of Business and Government. Prof. Charles, a fellow Harvard student, asked me to put the current financial crisis in historical prospect and discuss the various related ethical issues.

My lecture began with an overview of the birth of Capitalism and of the modern banking system in early Renaissance Florence. I explained that the word bank comes from “banco,” which is a wooden table that a Florentine banker would place on the street and at which he would discuss business with clients. The Medici had their Banco right in the center of the city, in via Porta Rossa. then illustrated how the popularization of Double Entry Bookkeeping, described in a famous treatise by Leonardo da Vinci’s friend Luca Pacioli (1446/7–1517), gave great impulse to commerce. It enabled a visual conceptualization of assets and liabilities and permitted the interpretation of a loan as an asset. Thus, almost as if through the magic of mathematics, money growth was invented. While a bank depositors’ money was out as a loan and producing more money the depositor could still, at any time, collect his money with the bank. This is how money expansion was created.After explaining how Renaissance bankers circumvented the prohibition on interest collection and payment, considered usury, I went into a comparison between capitalism then and now.

Then as now, the drive towards creating monopolies was strong. The Medici started their social ascent as successful bankers, and their initial forays into politics were motivated in part by the need to control, and sometimes eliminate, competition. In our times we have seen the same phenomenon, with Wall Street bankers gaining undue influence in government.

When it comes to crises and ways to prevent them, the Renaissance “Medici model” was substantially different from the present one. As both bankers and regulators, the Medici could count and few regulations and effective enforcement. Moreover regulation was a lot more pragmatic and result-driven then it is now. I explained how words like “ethics” and “virtue” meant something quite different during the Renaissance, as they had not undergone the allegoric transformation that took place from the Baroque period to Romanticism. Virtue then simply meant force without moral qualifications, and ethics was a description of human behavior rather than a description of what is morally good or bad.

If Medici history can shed any light over the recent crisis it would point its finger to the lack of pragmatism and effectiveness in regulating banking systems and the flawed human behavior that manages them.

Regulations are based on unrealistic and ideal assumptions about human nature, and are written in such a way that their application requires mind-splitting decisions about the ethical and virtuous psychology of action. The abstract nature of regulations is a monumental obstacle to enforcement. The legal system is overburdened with blurred concepts that make reaching the threshold of “evidence beyond reasonable doubt” in fraud cases almost impossible. It is a lawyers’ paradise.

Manfredi Piccolomini