Fintech in Early Renaissance Florence:
European trade supremacy achieved through a systemic application of “fintech”.
This post is planned as one of several publications to review different historical shifts and the massively scaled innovation adoption these shifts formed. An inspiration point was a news article, shared by a good friend and the eminent don on the topics of digital money and identity, dgwbirch, about Italian PM plans to limit cashless transactions (backtracked on December 21st).
From that ensued a laborious 4-weeks (re)tracing of historical books and research papers I met while getting my History degree — on medieval and early Renaissance innovations in Florence — to demonstrate how cashless culture became possible and what it enabled — a major extension of credit transactions verified by audit, backed by sound accounting methods across numerous industries — and secured by personal trust and reputation.
As usual, one can download a short PDF and/or read the post below.
Fintech in Florence: not about banking, all about commerce.
The solidity and prowess of Florentine banking, together with tradesmanship of Pisa, Genoa, Siena and Venice formed, ipso facto, by trade, a carefully maintained control over routes they have navigated (using certain novel imported instruments like magnetised needle, allowing to navigate away from a shore), via a strict republican monopoly on seafaring (ships belonging to the state — while being funded by merchants).
The premiums garnered from trading spices and slaves from the East allowed the republics to become major lenders across Europe (venetian ducats and florentine florins were a well received standard) and secure important political alliances, that guaranteed prolonged periods of peace and prosperity.
Yet success was not always guaranteed; even the surety over steady supply of precious metals could have been discounted for nought by sudden change — of climate (Little Ice Age), a geopolitical shift (Ming dynasty reverting to silver coin and depleting supply of silver bullion imported from into Europe), or simple regal mismanagement while waging ruinous wars and building expensive fortifications.
A system that remains a dominant one, shall have embedded resilience and mechanisms to cushion the above mentioned risks and even use them to its advantage. Florence — or rather its entrepreneurial sector achieved that.
A notable fact: to secure the golden florin reputation — it was almost never debased and to account for inflation — Florence (and other Italian republics) used a dual system of gold international unit and silver coins that were used to pay salaries within its borders.
“Piccioli could only be changed into florins by the bank at the going rate for changing silver into gold. The picciolo was the currency of the poor, the salary of the worker, the price of a piece of bread.” — Medici Money: Banking, metaphysics and art in fifteenth- century Florence by Tim Parks
The dominance of Florentine merchant banking was not just based on inventions that other Italian republics also had access to: it had to propagate and integrate them across vital industries that carried the goods: to enable the flow of trade, maintain the exchangeability of currencies that permeated it, guarantee the provenance of units of credit in international trade and sourcing of knowledge, tools and services to facilitate it.
A veritable marketplace paradise (discounting for the facts of plagues and diseases, fickly mud on streets and occasional wars) — it had to develop instruments (what) and management practices (how) to maintain proper cohesion. Solely via inventions alone — in a society that was very much stratified around secretive guilds — Florence could not achieve the dominance it did. It had to build a system that scaled them and amplified them where they mattered, for the Republic to stay a vibrant commercial hub.
There had to happen several structural and institutional developments, that then put to use the inventions documented by Luca Pacioli in his 1494 treatise “Summa de arithmetica, geometria, proportioni et proportionalita” — they were already widely used by the time he wrote about them.
The roots of the commercial success that is the object of this historical fintech perspective.
A massive expansion of “trust” and reputation networks:
The medieval merchant, like his modern cousin, was obsessed with the calculation of profit and loss. Unlike the modern capitalist, however, the calculation of profit and loss was accompanied by another obsession: the calculation of honor and shame.
The Republic had to evolve or die.
A series of events rocked the foundations of Florence, the first with bankruptcy of formidable banking houses of Bardi and Peruzzi in 1342 — because of English King Edward III defaulting on extended loans. Majority of businesses being family affairs — the damage was immense, touching all branches and investments of the family houses.
The second — the Black Death in 1348 killed 2/3 of the Republic population — shattering a balance in terms of guilds and other economically engaged population’s involvement in the management of Republic affairs and financing its business through a variety of taxes levied on them. While economic opportunities grew in the aftermath — so did the tax burden.
The third — the Ciompi Revolt in 1378–82 one can understand as one of them examples of “no taxation without representation” — predominantly consisting of the wool carders guild members — called for more equitable taxation regime — and while the rebellion has been suppressed — it set in motion a series of changes, culminating in the more or less balanced assessment of ones wealth and taxation.
The evolution that led to the financial supremacy was embedded in the social system and the moral code developed by humanists and intellectuals — concerned equally about the gain and the eternal fate: an appropriate anecdote one can share — is about Cosimo Medici, upon consecration of the restored Monastery of San Marco, that he gave 10 000 florins, asked the pope Eugenius IV, get an increase in the indulgence that the Church was handing out to all those who attended the ceremony. The pope gave way: ten years off purgatory instead of six (time allowed for those remembering the dead to pray for them — that in enough time their sins are absolved and they get to Heavens).
“The final product, on the one hand, was a vibrant financial system that dominated European international finance for a century and, on the other hand, was an intensely status-conscious but politically permeable merchant elite that created generalists (“Renaissance men”) for whom economics, politics, family, art, and philosophy were all refractions of each other.”
The bankers guild penetrating into the ruling class post Ciompi Revolt, as reported by Padgett and McLean in “Organisational Invention and Elite Transformation: The Birth of Partnership Systems in Renaissance Florence” led to several important changes:
- Integration of Arte del Cambio (bankers guild) via marriage into the Republican elite. While in mid 14th century guilds rarely “changed their borders” — they also guarded their business practices. Political mobilisation after Ciompi Revolt led to opening up and fusing of accounting techniques — that allowed the system as a whole to evolve.
- To solve the piling problem of the “mountain of debt” — a “future tax” that the Republic collected with promises of interest to finance occasional wars with Milan — majority of asset rich households were then willing to sell these notes at a substantial discount — and bankers in power were willing to oblige;
- Shielding from repetition of “Bardi and Peruzzi problem” the very legal form of how businesses engaged in cross border trade had to change. With new domains that bankers entered to balance the deteriorating wood industry and inter-marriage — risk of bankruptcy loomed and so one had to adopt a different ownership model.
This international versus domestic division of labor was reinforced administratively by the guild structure — Arte della Calimala for international traders of finished cloth and Arte del Cambio for domestic bankers. With aggressive political mobilization of them by elite moderates after the Ciompi revolt, however, cambio bankers systematically were pulled up into the “jet stream” of international trading, thereby injecting domestic banking organizational forms and accounting practices into international trading.
The Partnership:
“<Max> Weber posited that the bilateral commenda of the twelfth century was the antecedent of limited partnerships (accomandite) documented in fifteenth-century Florence and an alternative to general partnerships, in which all partners shared full liability and therefore were usually blood relatives or close kin”.
While organisations to share risk were known in Islamic law since 8th century — “mudaraba” or “quirad”,
“in the aftermath of the Ciompi Revolt, when Florentine republicanism became more oligarchic, the city’s businessmen adopted a bifurcated strategy: merchant bankers involved in international commerce and finance organized their firms in systems of partnerships more frequently than local traders, who continued to operate as single proprietors or with general partnerships”
The crash of general partnership model exemplified by Bardi and Peruzzi banking houses — exposed reliance on family firms alone: it led to evolution where senior partners owned majority of formally independent companies.
It also exemplified separation of family and business, while inviting new perspectives and local (for international branches) external personnel becoming full partners.
The “social contract” that bound the partnership:
Business bound by a new legal form was still personal — in a way that parties came to know one another through a ritualised process, connected not just through ink of the agreement, disputed if needed, in a commercial code, but connected also through their respective reputations and social capital.
Two-thirds of banking “firms” engaged in relational, not impersonal, trading when dealing with each other.
Likewise, about 70 percent of wool “firms” engaged in relational, not impersonal, buying from banks.”
In trading among wool “firms” and in all types of buying and selling between banking “firms” and everyone else, 25 percent to 35 percent of wool and banking “firms” engaged in relational, not impersonal trading.
Quote from: Was Florence a Perfectly Competitive Market? Transactional Evidence from the Renaissance McLean / Padgett
Credit — credere — meant not just an extension of money into a new entreprise — but an act of trust. It was bound by onore that was often mentioned in the legal correspondence done between partners.
The establishment and measurement of honor through gossip among businessmen was important to the discipline of Florentine markets. But in social exchange there is also the deeper idea of making each other through gifts. “For Paolo da Certaldo, ‘a man without a friend is like a body without a soul’ and ‘a man who loses his friends is worse than dead’.”
The accounting had to follow — and it did:
The new legal construct had to stand at least in terms of 3 ways:
- In terms of ability to verify ownership and capital (corpo) contribution;
- To track business activity in terms of relationship of other businesses — owned or contracted, that entrepreneurial activities of partners brought in, so that it could also then be properly calculated at year’s end;
- To allow verifiable assessment for tax purposes;
It had to be reflected and so comes the rapid adoption of double entry book-keeping, bilateral format becoming widespread in 1380ies — following massive increase of partnership companies registrations. Yet it has added a few other transformational qualities for the cross border business:
Double-entry books allowed to assess:
- The individual position of a given company;
- Its relationship with other companies of any given partnership;
- Exposure in terms of risk and leverage;
- Compared with a “static” single-entry bookkeeping provided a dynamic system that tracked risk exposure and allowed to build a whole network of relationships. A legal framework led to accounting practice that instilled a new management practice.
Motivation of a new and more equitable way to tax
As told earlier, the Republic motivation to transition to a new tax system, enacted with so-called catasto in 1427 (The word catasto is a borrowing from Venetian catastico, from Byzantine Greek κατάστιχον (katástikhon, “line by line”) - meaning wealth assessment and taxation)
This had eradicated old medieval distinctions of communal taxation replacing it with individual household assessments and replaced the wide variations of historic valuations with a common system applicable to all (prior to the catasto of 1427, most urban citizens were exempt from the estimi and the rate of the estimi varied by city to city).
The difference of the proposed system was in a Republic-wide wealth assessment and a particular addition to the way tax has been calculated.
The wealth tax excluded debt.
“In 1427, Florence levied (massive) taxes on the basis of reported net wealth — that is, total gross wealth, minus liabilities. Thus, each household head had a substantial financial incentive to generate as long and as hefty a list of named debts/ creditors as possible. In order to combat cheating, Florentine officials also demanded a parallel list of named credits/debtors, so that they could cross-check one person’s claimed debt against another person’s claimed credit”
Double-entry became a viable instrument to prove legitimate activity. It also promoted capital to work — loaned into a viable enterprise, built on social capital, trust, and religious piety (“in the name of God and profit” were the words written in one of the accounting ledgers of famed Prato merchant Francesco di Marco Datini).
Supremacy
Altogether the elements of the system — the social changes underpinned by propagation of tools and practices of their use — supported Florence premier position on the European trade market: the first embedded fintechs one can recognise in the activities of trade houses of Italian merchants:
The volume of trade was so big that even a theoretical fallback settlement in coin was not possible: there was just not enough coin to cover the volumes: — and from that came another benefit to the international trade: massive use of bills of exchange — further lowering of cost, risk — and resulting interest rate charged: Florentine bankers additional innovation was the creation of an accounting unit — to be compatible with other markets dominantly duodecimal (12) systems of weight and value:
Books and articles used:
Three key historical articles were used to summarise and digest the changes that facilitated the “fintech moment for Florence”:
- Economic credit in Renaissance Florence — 2011 — by John Padgett and Paul McLean
2. Organisational Invention and Elite Transformation: The Birth of Partnership Systems in Renaissance Florence — 2006 — by John F. Padgett and Paul D. McLean
3. Renaissance Florence and the Origins of Capitalism — 2020 — by Francesca Trivellato
4. Was Florence a Perfectly Competitive Market? Transactional Evidence from the Renaissance — 1997 — by Paul McLean and John Padgett
5. Cambium non est mutuum: exchange and interest rates in medieval Europe By ADRIAN R. BELL, CHRIS BROOKS, and TONY K. MOORE
Books:
On Florence, its cultural impact on art, rediscovery of ancient texts imported into the city — countless good books are written. I can probably note the following I immensely enjoyed:
- Paul Strathern — The Medici
- Tim Parks — Medici Money
- Mary Holingworth — The Medici and her equally captivating (4)Princes of Renaissance
5. Raymond de Roover — The Rise and Decline of the Medici Bank, 1397–1494
The philosophical and humanist aspects of what fuelled the collection of best available of representation of nature in art and literary form — and catalysed the study of trivium (grammar, logic, and rhetoric) and quadrivium (arithmetic, astronomy, music, and geometry) — is artfully told by (6) Ross King in his Bookseller of Florence.
One shall also mention a beautiful story told by Stephen Greenblatt in his (7) “The Swerve: How the World Became Modern”, about the rediscovery in a St. Gallen monastery by Poggio Bracciolini, an (anti)papal bureaucrat and scholar, of a philosophical poem “De Rerum Naturae” by Lucretius, itself a re-telling of Greek Epicurean philosophy and propelling humanistic thought in so many domains and altering the view as to how nature interacted with one of human’s soul and body.
This neo-Platonic view, in some way is a breakthrough moment (at least in my opinion) for proto-scientific study of a wide variety of phenomena that is engaged by manufacturing / production (one that I will try to cover in a separate post reviewing a captivating Joel Mokyr article about the roots of science and then of formalised R&D as catalysts for growth).
