The Financiers of Medieval Florence

Banking as we know it today was hardly in existence before the 17th century. However, there was something of a financial revolution in late medieval Italy and it saw a new type of firm offer financial services, and indeed banking services, taking deposits and lending money, even across national borders. These firms were principally interested in trade, in purchasing and transporting commodities, those costly and common alike. However, at a time when credit was hard to come by, these firms had to learn how to raise and deploy large amounts of money, often lending it out to those in power so to gain access to the goods they traded in. Florence was home to several of these innovative companies whose operations spanned the continent in the early 14th century before simultaneously collapsing in the 1340s.

Florence and Finance

Florence is most well known for being the center of the Renaissance, history that associates the city with the triumphant successes of the 15th century in contrast to the bleak medieval world. In financial history, the city is famous for being the home of the Medici banking family who had much to do with the Renaissance then underway. However, the Medici were not the first financiers of Florence. In the 13th and 14th centuries, Florence was home to hundreds of bankers, merchants, and money changers, serving the city that just before the plague of the mid-14th century, had a population of 80,000 people. It was among the financial capitals of Europe and a center for the trade of gold and silver coins and bullion, a factor that helped to make the city’s currency, the florin, the unit of account all over Europe.

Prior to the Medici, the city was home to several mercantile firms, that of the Peruzzi, the Bardi, and the Acciaiuoli, among others. These companies traded in commodities across both the Mediterranean and Continental Europe, a business that forced them to develop financial expertise and offer financial services that, although not quite like those of modern banks, were nonetheless significant. Lending was not the core business of the Peruzzi or the Bardi but it was employed in order to secure access to the most lucrative commodities at the best prices.

They were also complex and sophisticated, raising money for their operations in the form of equity, loans, and deposits and operating more like investment funds than modern banks with fixed capital and long horizons. These early financial firms would typically raise capital and deploy it over a few years before winding down and disbursing all profits to investors. Then it would start the process again from scratch, raising fresh equity capital for a new fund. Thus, to speak of the ‘Peruzzi company’ is actually to speak of the ‘Peruzzi companies’, a series of sequential but distinct ventures. Also unlike modern banks, they were mostly involved in trade, with lending a secondary business.

Peruzzi

Of the firms just introduced, it is the Peruzzi that have the most well-known history. Much of the reason is that the commercial family’s accounting records from the 1330s and 1340s survive to this day. They list the assets and income of the firm and in the process reveal much about the operations of the company, which was in reality more than just a family firm. The Peruzzi had outside partners and shareholders who tended to outnumber family members. One of these was Giovanni Villani, a partner working in one of the firm’s scattered branches in far-away Bruges. Villani was also a chronicler and his written accounts offer even more material for understanding this old firm.

The Peruzzi traded luxury goods and commodities in the late 13th century. Among their most profitable trades was the procurement and shipment of grain from Southern Italy which was important to feeding the people of Florence. They also lent to Robert, King of Naples, who granted them access to the kingdom’s grain production for export. As the firm grew, they got into the business of managing the finances of the pope and Church during the Avignon Papacy, transferring funds to and from Avignon and other ecclesiastical centers. This business was secured owing to the vast network of branches that the Peruzzi developed across Europe. However, at this time, the firm did not take Church deposits or make loans to it, a characteristic that would set the future Medici relationship with the Church apart.

The firm was led by Filippo de’ Peruzzi from 1292 to 1303, the period in which the company grew rapidly, and then by Tomasso de’ Peruzzi during its heyday from 1303 to 1331. At its peak, the Peruzzi firm had at least a hundred employees working across fifteen branches, not just in Florence, but from London to Tunis. The company had 500,000 florins in assets in 1335. For comparison, a typical wage for a notary or accountant might have been around forty florins a year, putting the firm’s assets at something like $500 million to $1 billion in modern terms. These assets were funded with loans and deposits on which the Peruzzi paid 7-8% in interest, well under the borrowing costs of the city government itself. On its equity capital, the firm earned a return of between 10-20% for most of Tomasso de’ Peruzzi’s time in charge, returns that would seem perfectly good for a successful bank today.

Another trade that enriched the Peruzzi was the export of English wool to Flanders and Italy. As in Naples, the operations in England combined trade with lending; the Peruzzi lent money to the English king, Edward III, in order to access the wool trade. The Peruzzi needed to ingratiate themselves with monarchs because valuable commodities were controlled by them; even if they were produced privately, such production and trade was often done under royal license. Failing to serve the wishes of the king would be bad for business. Poor relations with a previous English king, Edward I, had caused another Italian firm from nearby Lucca to have its English assets confiscated in the 1290s, an event that led to its bankruptcy.

Edward III used the money he raised from the Peruzzi to fund wars against Scotland and France; the Hundred Years’ War against the latter started in 1337. Wars were the usual source of monarchs’ cash flow problems since they presented large immediate expenses that steady tax revenues could not fund. Though some city states in Northern Italy had access to nascent sovereign bond markets, these were yet undeveloped in Northern Europe. As a result, kings turned to merchants to obtain loans, putting many larger merchants in the lending business whether it was their intention or not.

Bardi

Another of the early 14th century Florentine financial firms was that of the Bardi, a prominent commercial family not unlike the Peruzzi. The Bardi had the larger firm though, with perhaps 50% greater assets and over three hundred employees at its height, many trading in the same commodities as the Peruzzi. The similarities continued; the two firms also provided financial services to the Florentine state, going so far as to collect taxes and handle the payment of civil servants’ salaries on its behalf. Like the Peruzzi, the Bardi also made loans to England’s King Edward III and were similarly engaged in the English wool trade, which made up half the firm’s earnings in the early 1330s. They used their massive capital to their competitive advantage by providing financing to wool producers often by purchasing several years’ production with one lump sum. Interest on this financing took the form of a discount to market prices.

The Bardi firm was larger than that of the Peruzzi by assets and employee count and this allowed it to be at least as politically active in Florence. Political trouble in the city was infamous. The family even led a coup against the government in 1340. It proved to be unsuccessful though; the city continued to suffer from political dysfunction and the episode led to the exile of sixteen members of the Bardi family. Though none of these were active partners in the company, it nonetheless foreshadowed the decline and fall of the firm.

Collective Collapse

Meanwhile, the Peruzzi firm’s warehouses in Florence were damaged in a flood in 1333. This was the beginning of an unfortunate decade for the company. It lost its papal business late in 1341 due to political tension between Florence and Pope Benedict XII. Then, in 1343, the city of Florence defaulted on a debt of 1.8 million florins. The city was a risky credit, forced to pay interest as high as 15% for new loans. Unfortunately for the Peruzzi, the company held Florentine loans.

The very next year, the company’s other major borrower, Edward III of England, defaulted on his debts. The king owed some 900,000 florins to the Bardi and 600,000 to the Peruzzi according to Giovanni Villani, numbers which were likely a gross overestimate. Nonetheless, any default likely hurt the Florentine financiers, both of which were exposed to some extent. Whether this default caused the collapse of the Peruzzi and Bardi firms or merely coincided with their fall, it nonetheless reduced any recoveries to be had by the firms’ creditors. The Peruzzi company entered bankruptcy in 1343, by which point headcount had shrunk to forty-seven at the firm. Recoveries for its creditors came to 37%. The Bardi performed slightly better, failing only in 1346 and generating recoveries to its creditors of 48%.

The Acciaiuoli, another firm engaged in similar business in Florence, had failed the same year as that of the Peruzzi. However, the Acciaiuoli had made no loans to the English king, suggesting the worst pain afflicted on the city’s merchant-financiers was not the English default. Rather, it was likely the political and financial trouble in Florence that caused the simultaneous collapse of these firms.

The political and fiscal predicaments had worsened simultaneously. In 1343, Walter VI, Count of Brienne governed the city after being installed as ruler by the Bardi and Peruzzi. He was unable to repair its fiscal and political dilemmas though, triggering the city’s default on its debts and the Count’s overthrow. Whatever the exact cause, these massive distinct firms founded in the mid-13th century had each collapsed within three years of each other in the 14th century. It was their disappearance that gave the Medici family free reign to form a still more advanced business empire with reduced competition in the decades ahead.

Lesson

Though modern banks were still centuries in the future, as deposit-taking institutions that lent money, the Florentine merchant firms had some qualities of banks. They certainly are evidence of financial development in the medieval world even though they were not engaged in banking as their primary business. Their success predated even that of the Medici by roughly a century. True, the Medici serve as a link between the older Peruzzi and Bardi and more modern institutions and a link between a medieval and modern world. However, sophisticated financial services and complex private financial institutions were not their original creation.

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