Money and Banking

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Money and Banking

Money in the form of metal coins circulated freely in Europe during the Renaissance, and many of the techniques and institutions of modern banking emerged at that time. Italian merchants led the way in these advances. However, by the 1500s Italian banks had declined, and the center of banking activity shifted to northern Europe.


Renaissance banks can be divided into three basic categories: pawnbrokers, merchant banks, and deposit banks. Each type performed distinct activities and served different customers, but their activities overlapped to some extent. For example, merchant banks sometimes offered savings accounts, while deposit banks at times made small loans or engaged in long-distance commerce.

Pawnbrokers. The smallest Renaissance banks were pawn banks, which lent money to individuals who pledged some form of personal property as security for the loan. Pawnbrokers charged interest on these loans, even though doing so violated the church ban on usury—the practice of charging interest for the use of loaned money. In many places the interest rate reached 60 percent. Early pawnbrokers were mostly Christians, but Jews became more active in this line of work in the 1300s and 1400s. Italian cities, hit hard by plague*, famine, and war during this time, sought out Jewish moneylenders. Christian opposition to Jewish moneylenders led to the establishment of nonprofit Christian pawn banks that charged a very low interest rate. These banks later developed into public banks run by powerful local political figures.

Merchant Banks. Also known as international banks, merchant banks lent large sums of money and extended credit across borders to promote trade abroad. Northern Italian cities took an early lead in this form of banking, establishing branches in several European countries. A board of directors owned the company and hired employees to manage the branches.

The three major Italian merchant banks collapsed by 1345. The reasons for their failure included changing markets; unwise business practices, such as loaning money to monarchs; and poor organization. For example, the board of directors of the Peruzzi bank of Florence owned all the bank's branches. When one branch failed, the rest followed soon afterward.

A new generation of bankers arose in Florence to replace the failed banks. The best known of these was the Medici bank, with five branches in Italy and four in northern Europe. The Medici bank derived much of its profit from providing services to the papacy*, and it had a more stable structure than the earlier banks. Each branch was run by a separate partnership with its own funds and its own set of books. The branch managers shared in the profits, while the senior partners in Florence owned about half of the capital at each branch. This meant that one branch could fail without causing the collapse of the others.

Merchant banks engaged in activities such as trade and commerce, foreign exchange, and maritime* insurance. Profit in foreign exchange came through the bill of exchange, one of the great banking developments of the time. The bill of exchange involved four parties: a deliverer and taker in one place, and a payer and a payee in another place. The deliverer lent money to the taker, who gave a bill of exchange in return. The bill was then payable in another location in another currency after a certain period of time. The bill specified a certain exchange rate between the two currencies. Profits came from hiding interest rates in the exchange rates, which enabled the banks to avoid the church ban on usury. Bills of exchange made it much easier to transfer funds over long distances without the risk and cost of transporting coins.

Renaissance merchants and bankers also made important advances in

accounting. New practices, such as the double-entry method of bookkeeping, made it easier to keep track of profits and losses, as well as increased trade activity. Italian merchants introduced this new system sometime around 1300. By 1500 it had become widespread throughout Europe.

Deposit Banks. Local deposit banks accepted deposits, exchanged coins, and made payments by transferring funds between accounts. The two main types of deposits were non–interest-bearing accounts, used by merchants to settle short-term business debts, and longer-term time deposits that paid interest to the depositor. Deposit banks rarely settled accounts by transferring coins. Rather, they adjusted the book balances of their depositors' accounts, enabling the banks to invest much of the deposits in commercial enterprises or to lend them at interest. This created the phenomenon of "bank money," in which a bank holds only a small portion of its total deposits in cash. Bank money is one of the foundations of the modern banking system.

While these practices increased the amount of money in circulation and promoted trade and commerce, they were risky. Investments did not always yield profits, and many banks failed because of bad investments. Deposit banks all but disappeared from the Low Countries* during the 1400s, and a financial panic in 1498–1499 caused most of the banks in Venice to fail. These failures led to the establishment of public banks, created by the government and run by public officials. Public banks could not make loans to private individuals or hold the accounts of private banks.

A shift in the centers of European banking accompanied the rise of public banks. Italian banks such as the Medici bank declined, while banks in southern Germany prospered. Financial problems in Rome and the failure of Italian banks to recognize profitable new markets contributed to the change. Jacob Fugger, a merchant from Augsburg, ran the greatest of the new banks. German banks adopted an organization similar to the Italian banks and followed many of the same practices. Public banks, particularly those in England and the Netherlands, dominated banking after the 1500s.


During the Renaissance people used three types of coins for money: gold, silver, and billon (silver mixed with a base metal such as copper). Most small transactions in the marketplace involved billon, while people paid rents and made large purchases in silver. Merchants and businessmen used gold coins for large international transactions.

A coin's value depended on its weight and the purity of the metal from which it was made. The popular and widely imitated florin, minted in Florence, consisted of 3.5 grams of 24-karat gold. Silver coins varied from the 2-gram Italian grossi to the Tyrolese guldiner at 31.6 grams. The amount of silver in circulation increased after the discovery of rich deposits in southern Germany in the 1400s. In the following century the Spanish conquest of America introduced large amounts of silver into Europe's economy. Silver pennies were the common unit of exchange for many people. Most pennies contained little silver, so they were frequently debased, or reduced to billon. Because debased pennies grew dark with use, people referred to them as "black money." Mints made little profit from producing pennies, which led to a shortage of them throughout Europe.

(See alsoCoins and Medals; Economy and Trade; Medici, House of. )

* plague

highly contagious and often fatal disease that wiped out much of Europe's population in the mid-1300s and reappeared periodically over the next three centuries; also known as the Black Death

* papacy

office and authority of the pope

* maritime

relating to the sea or shipping

* Low Countries

region bordering on the North Sea, made up of present-day Netherlands and Belgium

Ghost Money

Renaissance merchants and accountants used moneys of account, or "ghost money," to balance books and keep accounts. These represented a measure of value rather than a store of wealth. For example, merchants' books in Italy listed account balances in lira, soldi, and denaro, but only the denari was an actual coin. The others represented imaginary units of money: 12 denari equaled one soldo, while 20 soldi equaled one lira. An exchange rate, which varied over time, existed between real coins and moneys of account. The introduction of new coins complicated the system. By the 1500s Europe used dozens of different moneys of account.