Episode 11: Sin and Profit

We take a step back from the life of Giovanni di Bicci dei Medici to look at banking, commerce, and religious and legal attitudes about usury and luxury in Renaissance Florence. How did the Medici and other Florentine dynasties prosper in banking when loans with interest were considered a grave sin and a form of theft? 

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I decided to take a brief break from telling the story of Giovanni di Bicci’s life to give a little context to exactly how the Medici made their money. Let’s talk capitalism. Or proto-capitalism.

I’ll fess up, I’m a historian who hates talking about “isms”. If you’ve ever been dragged into a debate about the meaning of socialism or nationalism or postmodernism, you might know what I mean. Don’t get me wrong, “isms” do refer to things that are real and tangible. But at the same time all “isms” are totally made up for our convenience. And yet people, whether they’re people itching for a fight on Twitter or they’re an academic with an essay or book to shop around, love to argue about definitions and what is or isn’t that “ism.” I don’t want to shame my chosen profession, but I do think historians get too hung up on “isms.”

Capitalism is probably the – I don’t know – Holy Grail of “isms” because when you talk about capitalism you not only have to deal with history but with Marxist philosophy. On one side, you have historians like Martha C. Howell who argue you can’t even talk about capitalism unless you’re writing about a time and place that has an industrialized economy and a government that practices free trade. On the other side, you have Maurice Dobb’s argument that capitalism began within medieval European feudalism. Or the fact that some scholars are perfectly comfortable describing past times and non-European societies like Edo Japan as capitalist.

I don’t really mean to place my bets on any of these arguments. As my poor beleaguered PhD advisor could tell you, I really don’t like debates over terms. I will at least say I don’t believe in following too strict a definition of any “ism”, even capitalism. Even in the records of ancient Rome, a society where trade was considered a fairly dishonorable tradition, you can still find what we would call entrepreneur. For example, there’s Sergius Orata from the first century BCE who became extremely rich by inventing and commercializing a method for breeding and farming oysters, and possibly he also developed a technology for heating baths and bathhouse floors. It’s hard to make the case that Rome was a capitalist society, especially in terms of how dependent its economy was on slavery and how its culture negatively viewed commerce, but at the same time it isn’t too difficult to find…maybe traces of capitalism.

But honestly I think it’s too easy to get hung up on trying to find where the history of capitalism begins and the history of proto-capitalism or pre-capitalism or whatever you call it ends. The problem is that capitalism and most if not all isms are always in flux and always have different definitions. Even in our own recent history, the managerial, industrial capitalism that arguably hit its peak by the 1950s and 1960s is considerably different from the shareholder-dominated, service economy capitalism we live under or, as I’d put it, have to cope with. How hard a line should be draw between these? Are they at least different kinds of capitalism? These are the types of questions that…I just can’t bring myself to care that much about.

So, to get back on target, was Florence in late medieval and Renaissance history a capitalist society? I don’t know, and frankly I don’t think it’s an important argument, at least not as important as discussing how the economy of that time and place actually worked. I don’t think I’m offending anybody, but I can imagine some economic historian of Renaissance Italy who wrote a book about the subject of capitalism shaking their fist at my voice right now. In any case, at the very, very, very least, I definitely think you can draw a straight line from Renaissance Florence to modern capitalism.

If you do want to make an argument that capitalism started anywhere, northern Italy in the Late Middle Ages is as good a time and place as any. By the fourteenth century, it was no longer the most populated and urbanized place in western and central Europe. That honor was stolen by the Netherlands. However, it was still the region with the biggest commercial and industrial economy. The fact that international finance and trade permeated the economy caused it to also be the site for several innovations. Northern Italy became the first place in Europe that offered things like the bank deposit, the bill of exchange, the check, and the letter of credit. Double-entry accounting, which had existed in the Roman Empire and was developed independently in medieval Korea, also made a comeback.

However, these things had to co-exist with something that’s foreign to us: the idea that usury is a sin. Nowadays people, depending on their politics, will gladly say that the Bible condemns this or that, but very few people will talk about how clearly Judaism condemns usury:

“If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest.” -Exodus 22:25

“”If any of your fellow Israelites become poor and are unable to support themselves among you, help them as you would a foreigner and stranger, so they can continue to live among you. Do not take interest or any profit from them, but fear your God, so that they may continue to live among you.” -Leviticus 25:35-36

And those are just two examples.

Arguably Jesus in the New Testament was a little more ambiguous, but there are a couple of quotations from the Gospels that suggest Jesus shared the traditional religious attitude toward usury:

“But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the ungrateful and wicked.” -Luke 6:35

From the beginning, usury was strongly discouraged, and outright forbidden for members of the clergy. As banking became more common especially in Italy by the twelfth century, the Church actually doubled down on the topic. The Third Council of the Lateran, which was held in 1179, declared that “notorious usurers” would not receive the sacraments or a Christian burial. And they defined usury as an attempt by the lender to gain any profit beyond the principal of the loan, which is pretty broad. And the objection wasn’t just because of what the scriptures said. Theologians argued usury was essentially the theft of the fruits of the borrower’s own labor. One popular argument was even that usury was the theft of time itself, which should belong to God alone. Even though a native of Florence itself, Dante put usurers in the seventh circle of Hell in a burning desert along with sodomites and blasphemers. Interestingly, none of the usurers are Jewish, despite medieval stereotypes, but are members of great Florentine families.

More than a sin, there were also usury laws. But there were plenty of loopholes to get around both divine and earthly law.The most notorious of these was having Jewish people work as lenders and bankers since the Torah did allow Jews to loan money to non-Jews. Naturally, this fueled stereotypes of Jews as greedy, even though in many places banking was one of the very few good occupations open to them. Outside that, sometimes interest could be charged in a contract as a payment to offset risk or to compensate the lender for their work in drawing up the contract. The best and most lucrative loophole, though, was made possible through the exchange rate.

In his book Medici Money: Banking, Metaphysics, and Art in Fifteenth-Century Florence, author Tim Parks describes a scenario where a merchant from England comes to a banker in Venice. The banker will give him florins, and in exchange the English merchant will sign a bill of exchange that the banker can use to claim pound sterling from London. Once the exchange is fully made, the bank profits from the difference in the exchange rate.

Parks writes:

“Basically, the trick is that the currency quoted as a unit is always worth a small percentage more in the country of issue. As far as Florence and northern Europe are concerned, the difference in the two exchange rates, which determines the banker’s profit, is greatest in early spring…Manuals are written to help merchants and bankers get their minds around the system. Who needs interest rates?”

Generally theologians accepted this particular loophole, because at least there was still an element of risk for the lender. However, theologians and lawmakers did find it dicey. For example, one English law colorfully describes bills of exchange as “damnable bargains grounded in usury. Tim Parks continues:

“Usury was abominable but people needed loans and bankers a return for giving them. The complex system of differing exchange rates, possible only because of the time it took to travel from one financial center to another, provided an ambiguous territory that kept trade moving and many in a constant state of anxiety as to the destination of their eternal souls.”

As we’ll see with Giovanni di Bicci himself, bankers did take these ideas seriously and feared for their own souls. As you don’t need to be a historian to guess, though, anti-usury laws hit pawnbrokers and small-time money lenders much harder than the international bankers, who had the Pope and monarchs for clients and, of course, could easily gain all their profits from exchange rates.

As for working in finance and commerce generally, like I noted at the beginning of the episode there was something of a stigma against that kind of work in much of Europe. If you became rich through commerce and finance and was granted or even bought a noble title, you were expected to liquidate all your businesses and only invest in land. In France, it was even illegal to be a noble and operate most types of businesses. This stigma wasn’t just enforced by aristocratic snobbery, but was backed by rich commoners themselves, who didn’t want their businesses to have to compete with nobles, who usually enjoyed privileges like exemptions from most taxes. The distinction between nobles and commoners were also enforced in superficial ways. All across Europe sumptuary laws restricted what non-nobles could wear. The rationale was not just to preserve class hierarchies. The idea, rooted in both the Greek and Roman philosophical tradition and Christianity, was that luxury was morally corrupting, and letting just anyone show off their riches was harmful to the morality of the population at large.

Even though Florence had a government that empowered trade guilds and restricted the political rights of its own nobility, it too had its own sumptuary laws. These included a law mandating that only nobles could wear clothes more than one color and a ban on commoners having meals with more than one course. All women who wore any gold, silver, pearls, precious stones, bells – bells, really – ribbons of gold or silver, or cloth of silk had to pay a special tax of 50 florins a year. Women’s clothes could not have buttons except between the wrist and the elbow. In fact, conventional wisdom was that commerce itself was a source of moral corruption. As the great theologian Thomas Aquinas put it, “Greed is awakened in the hearts of citizens through the pursuit of trade.”

Even so, to go back to the opening, you could argue that Florence was capitalist, and not just because of its economy. The rich dynasties of Florence tended to buck the trend of Europe’s wealthy trading in their lucrative business for a noble title and/or land. Instead they did both, buying up land and real estate and also investing in trade. It’s probably too much to say that Florence was completely out of sync with the rest of Europe, but it is interesting that, as late as 1527, an ambassador from Venice was shocked to see some of the elites of the city working in their own shops doing the most menial chores. Basically, the expectation that once your family achieved a certain degree of wealth and prestige you should give up commercial activities wasn’t as strong in Florence as it was elsewhere.

So, the bottom line is that, for the purposes of our story, the question of whether or not Florence can be described as capitalist is not terribly important.  What is important is the fact that Florence at this time was one of the few places in Europe where a family of bankers could rise to the top of the hierarchy.