The Triumph of Banking: Money + Power = the Medici Family
As mentioned above, the world had known about credit for some time, but it would be taken to a whole new level in Italian city-states, especially in Florence, during the Middle Ages. A document (ledger) with a future payment date guaranteed payment to its owner; the ledger itself could be sold or inherited and, in essence, functioned as a currency.
Although credit providers have often been dubbed usurers in folk tales and depicted as mean, cruel and stingy old men, the credit system actually had an immense effect on the economy and primarily international trade. Some economists believe that it served as one of the main factors in shaping the modern economy.
The story of the Medici family, however, is the first example in history of a banker shaping his financial successes into an inheritable power. Although the family suffered several penalties and even assassinations, they remained in power – with short intermissions – from 1434 until 1743. Granted, in today’s terms, the family was mobsters through and through. The members of the shady family served as popes and even became part of the French court.
The Medicis adopted several innovations (the double-entry bookkeeping system, ledger-based transactions, etc.). As a number of banking dynasties went bankrupt, the Medicis managed to rise in their place and form a system of banks that supported each other. They worked efficiently by granting short-term loans to woolmakers and built a network of bank branches across Italy.
In addition to helping the economy of Florence bloom, the actions of the Medicis became an inspiration for the banking systems of the countries north of Italy, incl. the Netherlands, Great Britain, and Sweden. The Bank of Amsterdam was established in 1609 to handle the fourteen parallel currencies valid in the Netherlands. By allowing merchants to open accounts in a unified currency, the Bank of Amsterdam paved the way for cheques and the direct payment system we take for granted nowadays.
The system allowed the majority of transactions to take place so that the sum that exchanged owners was never converted into cash. The sum was merely debited from the payer’s account and credited to the seller’s account. As the bank’s cash reserves had the same volume as the deposits, the bank was unsinkable. However, the bank lacked one crucial function – it was not allowed to grant loans.
The Swedes took a step further when they established the Riksbanken in 1656. The aim of the Riksbanken was to promote trade transaction but also to grant loans – and in a far greater capacity than the bank’s cash reserves.
The Bank of England that was established in 1694 gained the monopoly for printing bank notes in 1742. Their aim was to simplify transaction even in cases where one of the parties didn’t have an account at the Bank of England. The British pound sterling served as the reserve currency (the currency that countries across the globe maintained a significant amount of their cash reserves in) for more than a hundred years until the post-WWI era when the British economy took a blow. The dollar became the new global currency, in part due to the fact that Great Britain abandoned the gold standard in 1931. Granted, the US followed suit in 1971, as they too did not have enough gold to secure the dollar. Then President, Richard Nixon did claim that the change was temporary, but that temporary continues to the present day.
By the mid-20th century, the development of banking and communication technologies, the global economy and a general improvement of living standards had led to the next great innovation – plastic money, i.e. the credit card. This would pave the way for PayPal, Apple Pay, and other similar payment apps. Society has entered an era that is increasingly more cashless.
