Banco dei Medici: notes on company organization

An international network, politics, managers in the right place. The rise and decline of the enterprise that transformed the Medici into the most famous Renaissance family

“Money in the bank!”

So the Americans say to indicate someone or something to whom they place security and reliability. Who knows if in the mid-fifteenth century the Italian and European merchant bourgeoisie expressed their blind confidence in a deal saying: “Oh well, it is like depositing the florins at the Banco Medici”.

Doubt can come, thinking of how many enemies and envy generated the success of the Medici family, but the metaphor would have been perfectly apt. Because, as Carlo Cipolla writes in “Easy history of the Italian economy from the Middle Ages to today”, the Banco Medici “was probably the largest international company of the fifteenth century“, and this in spite of a parable that lasted for a little less than a century: from 1397, the year of the foundation by Giovanni di Bicci (for example, the one played by Dustin Hoffman in the TV series “I Medici”), until the bankruptcy of 1494, with the expulsion of the Medici from Florence and the seizure of all their assets.

Giovanni di Bicci (1360-1429) was succeeded by his son Cosimo de’ Medici known as il Vecchio (1389-1464), who brought both the Banco and Florence to the apogee. His son Piero de’ Medici, known as “il Gottoso” (1416-1469) was less successful on the business front because he suffered from gout, and his nephew Lorenzo il Magnifico (1449-1492).

BUSINESS CYCLE AND “SOFT SKILLS”

The Medici were in fact only one of the Tuscan families dedicated to banking since the thirteenth century. They did not revolutionize the box of financial instruments available, nor the accounting: deposits, insurance, exchange letters (bills of exchange similar to today’s bills of exchange) were already widespread, as was the double entry method for recording income and expenses. In summary, we could highlight three elements: the economic cycle, the entrepreneurial and diplomatic ability, the organizational model.

For sure, they could count on what we would call today a favorable economic situation, which went down almost at the same time as the death of Cosimo il Vecchio (1464). The latter and his father Giovanni possessed skills that today we would call “managerial” and “lobbying”, exploiting economic power to forge relations with the courts and rulers of Western Europe. Not of little importance in the construction of entrepreneurial success, were the good offices that the Medici managed to have with the Papacy, to the point that among the many Tuscan banks operating in Rome, the branch of the Medici gained a privileged rank in the management of the Church’s treasury service.

THE HEIRS

Piero il Gottoso, on the other hand, had less experience and commercial familiarity: at the first winds of crisis, he withdrew a series of loans granted by his father, attracting the enmity of those who had been a supporter of Cosimo and now saw themselves reduced to poverty. The political ability of Lorenzo the Magnificent (1449-1492) to place himself as a balance in the institutional balances between the various Italian city-states according to some scholars was not equal to that of following the affairs of the Bank, or effectively supervise the work of its employees. The stability following the peace of Lodi (1454) took place in a turbulent period that culminated first in the Pazzi conspiracy (1494) and then in the exile of the Medici, replaced in Florence by the Republic of Fra’ Girolamo Savonarola.

FROM MERCHANTS TO BANKERS

As we said, that of the Medici is perhaps the most famous bank, but certainly not the first in chronological order. The history of credit has been written for good part in Tuscany since the thirteenth century, thanks to the commercial fortunes of merchants, then transformed into bankers, and the ability of the gold florin to establish itself internationally along with the other gold coin, that is the Venetian duchy.

Merchants began to found companies, called “companies” – hence the English “company” – by first involving all members of the same household in participating in the capital as shareholders and then by allowing outside shareholders to make a deposit, which would give rise to a coupon, much like modern bonds. The first “City” of humanity was on the bank of the Arno, which saw flow along with its waters, successes and miseries of the families Bardi, Peruzzi, Strozzi, Acciaiuoli.

The letters of exchange were a rather refined financial instrument for the time and allowed numerous advantages. First, they avoided the physical movement of money, especially in the case of large sums; interest and commissions paid on transactions circumvented the Church’s censorship of usury, because the letters were not technically loans; from the bankers’ point of view, were a tool for speculating on the exchange rate of the various foreign currencies. The international fairs were not only market events, but also real international credit and debt clearing houses.

THE “BRAND” OF THE MEDICI

Florence, Rome, Naples, Ancona, Avignon, Venice, Bruges, London, Lyon, Geneva, Milan, Pisa: between directly issued offices and offices managed by agents, Giovanni di Bicci and Cosimo Il Vecchio made the Banco Medici an international brand; a recognizable and recognized brand, guarantor in foreign trade and credit point to which European sovereigns could knock to finance their wars.

And yet, politics and armed conflict were as much a source of profit as of economic misfortune. The King of England Edward IV was unable to repay the loan used to finance the campaign in the Wars of the Two Roses between York and Lancaster (the latter were also financed and became insolvent); this led to the bankruptcy of the London branch of the Banco in 1478 with a liability of about 51 thousand florins, followed by the closure of the Bruges headquarters.

The story of the Roses is somewhat reminiscent of what was told in “The Iron Throne”. Stannis Baratheon turns to the institution to obtain a loan and finance the creation of an army, with which to regain the throne of the Seven Kingdoms, according to him usurped by the Lannisters. The Bank initially denies credit, as it already has a large exposure with the Lannisters. But Tycho Nestoris, representative of the Bank, is convinced that the best way to get back from that game is to risk, feeding the opponents of the Lannisters, because when their founder will be dead, political instability will worsen the quality of credit (a non performing loan). With Stannis Baratheon then… well, we know how it ended.

The Bank was the armed arm in coin of a rise to power that made Cosimo Il Vecchio, lord de facto of Florence (formally a republic), and then buried with the title of “Father of the Fatherland”.

The Medici are well known for having made Florence the cradle of Humanism and the Renaissance thanks to patronage and passion for the arts, while less celebrated are the origins of this power, namely the economic availability deriving from the profits of banking.

THE DECENTRALIZED MODEL OF THE MEDICAL SCHOOL

The historian Raymond De Roover, perhaps the most authoritative scholar of the Bank, has identified the business organization model, one of the main strengths and innovations of the Medici company.

The centralized model of the banks of the Bardi and the Peruzzi in fact foresaw that the headquarters of Florence governed all the branches in an interdependent relationship. The top roles of the branch offices were occupied by salaried employees, the so-called factors; shareholding was rather fragmented between outside partners and family members. In 1331, the capital of the Bardi was attended by 6 members of the family (with 37 shares) and 5 external (with 21). The same year, the Peruzzi’s external shareholders took control of the company because they owned the majority of the shares. This fragmented scheme gave problems of management, especially in the periods of vacatio of a recognized leadership, the litigation of the members was a factor of instability, able to aggravate the precipitation of events in liquidity crises that with a domino effect could blow the bank.

The Banco Medici instead recalls the structure of the modern holding company because it was characterized by a decentralized structure. Each subsidiary was a separate legal entity with independent capital and accounting. The various branches of the enterprise operated as if they were not united by the same property, including the application of commissions and rates charged for transactions.

The directors of the subsidiaries, the governors, were not employees but shareholders who participated in the capital and received a share of the profits. From the documents relating to the Bruges office, we know that the Medici tried to boost the productivity of local managers with generous benefits: in 1455 with 1/6 of the capital, the governor of the Belgian branch was entitled to 1/5 of the profits. The watertight compartmentalisation removed the likelihood that a local crisis could have an overall effect on the Bank’s financial stability. Although the governors could operate with a certain margin of decision-making autonomy in the ordinary administration, the brain remained in Florence.

Few members of the family, usually the parent and children, held between two thirds and three quarters of the capital. Cosimo the Elder was the creator of his own wealth thanks above all to the ability to choose with competence and attention who to send to the head of the branches scattered throughout Europe. Career opportunities were not restricted even to lower-level workers, but promotions generally arrived very slowly. Also from Tuscany came indications on factors and employees to be hired, often people close to the Medici, when not really within the family circle. This could sometimes lead to problems:

“A young man named Corbinelli, who had been sent to Bruges by the senior partners, was so clumsy that after a short trial period he was sent back to Italy. Antonio de Bernardo de’ Medici, the governor’s assistant manager, was another burden. Not very pleasant, he was hated by the rest of the staff. Even Portinari himself (the governor ed) did not hold him in high regard. But in the Middle Ages and the Renaissance family ties were strong. And though Antony was only a distant relative, he was protected by the fact that he bore the name of the Medici.”

Raymond De roover

Since it was impossible to keep a constant and up-to-date communication with all the branches, Cosimo il Vecchio and the Director General of the Florence headquarters were limited to providing general indications and guidelines.

Usually every two or three years, the governors went to Florence to brief the senior partners on the state of the business. The buildings that housed the offices on the ground floor with the big desks – the big desks – and on the upper floors apartments and residence of directors and staff, had to immediately communicate with their architectural magnificence the prestige of the Bank. We know, for example, that in the Bruges branch, governor and farmers worked and lived side by side in the same house. But the manager had the availability of accommodation only for the duration of his contract, because the building remained in the property of the Medici. In Milan, the economic-military alliance between Cosimo il Vecchio and Francesco Sforza sanctioned the donation of land by the Milanese duke for the construction of the Palazzo del Banco Mediceo, now no longer existing.

The contract stipulated at the time of appointment of the head of a branch then regulated in detail the powers and limits of the junior member: the obligation of presence except travel to international fairs, the prohibition to conduct business for personal gain or to accept gifts if not of modest value; the annual sending of financial statements to Florence and whenever required; the prohibition to grant credit to princes and sovereigns.

THE DECLINE

This last clause, when it was revoked in the contracts negotiated by the general manager Francesco Sassetti in the last phase of the Bank’s life, was the basis of the ruin of some branches, including Bruges and London, due to loans not repaid by Charles the Bold, Duke of Burgundy, and as we have already said by Edward IV of England. T

he excessive propensity to weigh more the reason of state than that of numbers, the low and very risky relationship between cash reserves and loans (for example, in Lyon, was equal to 2%), together with the not exceptional business flair of Lorenzo the Magnificent, who preferred to delegate management to the Director General Sassetti.

These elements, combined with the political turmoil and stagnation of the economy, caused the end of the Bank and the decline of the Medici. But not the end of the golden age of Florence, as an aggregate center of the best that the Italian cultural scene could offer at the time.

The Italian merchant-banker of the Renaissance had all the tools and techniques necessary for an activity regulated by economic calculation, but this was not enough to make him a pure “capitalist” operator in a modern sense, in a society in which wealth and money were always secondary and subordinate to the political power of the nobility and rulers

carlo m. cipolla