MAKE MONEY FROM MONEY

MAKE MONEY FROM MONEY

MAKE MONEY FROM MONEY

Humans have long engaged in borrowing and lending. There is evidence that these activities took place 5,000 years ago, in Mesopotamia (present-day Iraq) at the very dawn of civilization. But modern banking systems did not emerge until the 14th century in northern Italy.

The word “bank” comes from the Italian word for the “bench” on which the bankers sat to conduct business. In the 14th century the Italian peninsula was a land of city-states that benefited from the influence and revenue of the papacy in Rome. The peninsula was ideally located for trade between Asia, Africa, and the emerging nations

of Europe. Wealth began to accumulate, especially in Venice and Florence. Venice relied on sea power: institutions were created there to finance and insure voyages. Florence focused on manufacturing and trade with northern Europe, and here merchants and financiers came together at the Medici Bank.

MAKE MONEY FROM MONEY

Florence was already home to other banking families, such as the Peruzzi and the Bardi, and to different types of financial bodies— from pawnbrokers, who lent money secured by personal belongings, to local banks that dealt in foreign currencies, accepted deposits, and lent to local businesses. The bank founded by Giovanni di Biocide’ Medici in 1397 was different.

The Medici Bank financed long-distance trade in commodities such as wool. It differed from existing banks in three ways. First, it grew to a great size. In its heyday under the founder’s son, Cosimo, it ran branches in 11 cities, including London, Bruges, and Geneva. Second, its network was decentralized. Branches were managed not by an employee but by a local junior partner, who shared in the profits.

The Medici family in Florence were the senior partners, watching over the network, earning most of the profit, and retaining the family trademark, which symbolized the bank’s sound reputation. Third, branches took in large deposits from wealthy savers, multiplying the lending that could be given out for a modest amount of initial capital, and so multiplying the bank’s profits.