The origins of monetary and financial system
“il principe, di niccolò machiavelli al magnifico lorenzo di piero de medici” (Niccolò Machiavelli to the Magnificent Lorenzo de’ Medici” — The Prince)
Some wise people says “there is always a close relationship between economy and politics”. But when it has started to “institutionalization”?
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The libro segreto — literally the secret book* — of Giovanni di Bicci de’ Medici sheds fascinating light on the family’s rise. In part, this was simply a story of meticulous bookkeeping. By modern standards, to be sure, there were imperfections. The Medici did not systematically use the double-entry method, though it was known in Genoa as early as the 1340s. Still, the modern researcher cannot fail to be impressed by the neatness and orderliness of the Medici accounts. The archives also contain a number of early Medici balance sheets, with reserves and deposits correctly arranged on one side (as liabilities or vostro) and loans to clients or commercial bills on the other side (as assets or nostro).
https://www.youtube.com/watch?v=fsrtB5lp60s
The Medici did not invent these techniques, but they applied them on a larger scale than had hitherto been seen in Florence. The real key to the Medicis’ success, however, was not so much size as diversification. Whereas earlier Italian banks had been monolithic structures, easily brought down by one defaulting debtor, the Medici bank was in fact multiple related partnerships, each based on a special, regularly renegotiated con tract.
Branch managers were not employees but junior partners who were remunerated with a share of the profits. It was this decentralization that helped make the Medici bank so profitable. With a capital of around 20,000 florins in 1402 and a payroll of at most seventeen people, it made profits of 151,820 florins between 1397 and 1420 — around 6,326 florins a year, a rate of return of 32 per cent. The Rome branch alone was soon posting returns of over 30 per cent.
The proof that the model worked can be seen in the Florentine tax records, which list page after page of Giovanni di Bicci’s assets, totalling some 91,000 florins.
When Giovanni died in 1429 his last words were an exhor- tation to his heirs to maintain his standards of financial acumen. His funeral was attended by twenty-six men of the name Medici, all paying homage to the self-made capo della casa. By the time Pius II became pope in 1458, Giovanni’s son Cosimo de’ Medici effectively was the Florentine state. As the Pope himself put it: ‘Political questions are settled at his house. The man he chooses holds office … He it is who decides peace and war and controls the laws . . . He is King in everything but name.’ Foreign rulers were advised to communicate with him personally and not to waste their time by approaching anyone else in Florence.
The Florentine historian Francesco Guicciardini observed: ‘He had a reputation such as probably no private citizen has ever enjoyed from the fall of Rome to our own day.’ One of Botticelli’s most popular portraits — of a strikingly handsome young man — was actually intended as a tribute to a dead banker. The face on the medal is that of Cosimo de’ Medici, and alongside it is the inscription pater patriae-, ‘father of his country’. By the time Lorenzo the Magnificent, Cosimo’s grandson, took over the bank in 1469,the erstwhile Sopranos had become the Corleones — and more. And it was all based on banking. (From the Ascent of money)
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The foundations of the VOC were laid when the Dutch began to challenge the Portuguese monopoly in East Asia in the 1590s. These ventures were quite successful. Some ships returned a 400% profit, and investors wanted more. Before the establishment of the VOC in 1602, individual ships were funded by merchants as limited partnerships that ceased to exist when the ships returned. Merchants would invest in several ships at a time so that if one failed to return, they weren’t wiped out. The establishment of the VOC allowed hundreds of ships to be funded simultaneously by hundreds of investors to minimize risk.
The English founded the East India Company in 1600, and the Dutch followed in 1602 by founding the Vereenigde Oost-Indische Compagnie. The charter of the new company empowered it to build forts, maintain armies, and conclude treaties with Asian rulers. The VOC was the original military-industrial complex.
The VOC quickly spread throughout Asia. Not only did the VOC establish itself in Jakarta and the rest of the Dutch East Indies (now Indonesia), but it established itself near Japan, being the only foreign company allowed to trade there, along the Malabar Cost in India, removing the Portuguese, in Sri Lanka, at the Cape of Good Hope in South Africa, and throughout Asia. The company was highly successful until the 1670s when the VOC lost their post in Taiwan, and faced more competition from the English and other colonial powers. Profits continued, but the VOC had to switch to traded goods with lower margins, but they were able to do this because interest rates had fallen during the 1600s.
Lower interest rates enabled the VOC to finance more trade through debt. The company paid high dividends, sometimes funded by borrowing, which reduced the amount of capital reinvested. Given the high level of overhead it took to maintain the VOC outposts throughout Asia, the borrowing and lack of capital ultimately undermined the VOC. Nevertheless, until the 1780s, the VOC remained a huge multinational corporation that stretched throughout Asia.
The Fourth Anglo-Dutch War of 1780–1784 left the company a financial wreck. The French Revolution began in 1789, leading to the occupation of Amsterdam in 1795. The VOC was nationalized on March 1, 1796 by the new Batavian Republic, and its charter was allowed to expire on December 31, 1799. Most of the VOC’s Asian possessions were ceded to the British after the Napoleonic Wars were finished, and the English East India Company took over the VOC’s infrastructure.
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But there was one possible way out: the Rothschilds could use their gold to make a massive and hugely risky bet on the bond market. On 20 July 1815 the evening edition of the London Courier reported that Nathan had made ‘great purchases of stock’, meaning British government bonds. Nathan’s gamble was that the British victory at Waterloo, and the prospect of a reduction in government borrowing, would send the price of British bonds soaring upwards. Nathan bought more and, as the price of consols duly began to rise, he kept on buying. Despite his brothers’ desperate entreaties to realize profits, Nathan held his nerve for another year. Eventually, in late 1817, with bond prices up more than 40 per cent, he sold. Allowing for the effects on the purchasing power of sterling of inflation and economic growth, his profits were worth around £600 million today. It was one of the most audacious trades in financial history, one which snatched financial victory from the jaws of Napoleon’s military defeat.
The resemblance between victor and vanquished was not lost on contemporaries. In the words of one of the partners at Barings, the Rothschilds’ great rivals, ‘I must candidly confess that I have not the nerve for his operations. They are generally well planned, with great cleverness and adroitness in execution — but he is in money and funds what Bonaparte was in war.’= To the Austrian Chancellor Prince Metternich’s secretary, the Rothschilds were simply die Finanzbonaparten. Others went still further, though not without a hint of irony. ‘Money is- the god of our time,’ declared the German poet Heinrich Heine in March 1841, ‘and Rothschild is his prophet. (From “The Ascent of Money”)
