allowed for each bank to form its own partnership . Such independent entities functioned as separate legal units with their own capital requirements and individual set of ledgers .
Branch managers did not receive a salary but instead participated in the profits and losses based on their equity shares in the bank . Similarly , modern public accounting partnerships have kept these practices alive by allowing their partners a financial interest in their organizations . Furthermore , in some respects , the bank functioned like a holding company , for the Medici owned 50 % of all their subsidiaries . This is comparable in many respects to the contemporary model whereby a subsidiary ’ s outstanding equity is held by a larger owner / partner .
The banchi di pegno , or pawn shop , would extend credit secured by liens placed on personal assets such as jewelry . These extensions were granted with an interest fee attached to the loan , despite the Catholic Church ’ s ban on usury ( interest ). Under church doctrine during the Middle Ages and through the Renaissance , charging interest for the extension of money was considered avarice ; in essence , it was taking advantage of one ’ s hardship . Circumventions of this restriction occurred , however , as borrowers and lenders understood the efficacy of such arrangements . Lenders began attaching interest rates for repayment along with the principal at the beginning of the contract and not the end , thus bypassing church prohibitions .
Antisemitism played a role too , since the Catholic Church often associated usury with Jewish pawn lenders . However , Jews were encouraged — and often welcomed — by provincial governments to lend in poorer Italian rural communities since , presumably , many Christian bankers found these markets less profitable . Nevertheless , restrictions on the amount of interest charged was determined by local authority .
Interestingly , the symbol of the three balls , or roundels in French , seen hanging above or adjacent to the signs of modernday pawn dealers is said to have originated from medieval heraldry , or a coat of arms borne by a particular family . The roundel denoted the family dealt in money and was displayed on the arms of English , French and Italian families . According to historian Raymond de Roover , this included the arms of the Medici who — although they only dealt in merchant-banking and bills of exchange and not pawning — adopted as their family emblem the crest of the banker ’ s guild of Florence .
As mentioned , bills of exchange evaded Church restrictions on usury and , furthermore , served in the creation of deposit banking . In essence , the practice of purchasing the bill at a discount from its face value reflected a risk . Given this circumstance , the bill may not have been honored when presented ; thus , no interest was paid . Indirectly and in response to the risk of the client forfeiting his interest , merchant creditors required their clients deposit funds to cover this potentiality . These excess reserves could be lent — in foreign locales often not subject to Church jurisdiction — with interest , which , indirectly , furthered the expansion of deposit banking services .
The Medicis also served their clients by offering letters of credit — documents guaranteeing the payment of a customer ’ s bill up to a certain amount for a defined period . For example , if a merchant purchased a letter from a Medici bank for payment to a seller in a different city , the bank received currency . Meaning , a Florentine merchant who bought the letter made payment to the local bank .
The bank then had an account payable due to a bank , say , in London , where the merchant would purchase his goods . When paid to the seller in London , the Medici bank could take advantage of the differences in the foreign exchange rates between Italian and English currencies , thereby profiting from the transaction . Presentday financial transactions rooted in this Medici innovation consist of commercial letters of credit for third-party beneficiaries and confirmed letters of credit between those bankers having correspondent relationships . Others , such as revolving and traveler ’ s letters , are those automatically renewed for payment and for customers traveling abroad requiring drafts .
Contemporary accounting and financial services owe a debt of gratitude to the commercial acumen of the Renaissance financiers . Their intuition facilitated bookkeeping arrangements , simplified trade agreements and contributed to the development of international depository banking . We are both indebted to these innovators and enriched by their insight .
Ramon Vasconcellos is a history professor and lecturer in Accounting and Economics at Barstow Community College in Barstow , CA . He has published numerous biographical and topical articles on the history of the West , particularly related to finance . He has also taught Economics and History at the University of London .
Sources
Baskin , Barron and Jonathan and Paul Miranti . A History of Corporate Finance . Cambridge University Press . 1997 .
De Roover , Raymond . “ The Medici Bank : Organization and Management .” The Journal of Economic History . Vol . 6 . No . 1 . May 1946 .
Ehrenberg , Richard . Capital & Finance in The Age of The Renaissance — A Study of The Fuggers and Their Connections . Harcourt , Brace & Co . 1963 .
Giroux , A . Gary . Accounting History and the Rise of Civilization . Vol . I . Business Expert Press . 2017 .
Goldthwaite , Richard A . The Economy of Renaissance Florence . The Johns Hopkins University Press . 2009 .
Padget , John F . and Paul D . Mclean . “ Economic Credit in Renaissance Florence .” The Journal of Modern History . Vol . 83 . No . 1 . March 2011 . Pg . 10 .
Rosenberg , Nathan and L . E . Birdzell . How the West Grew Rich : The Economic Transformation of the Industrial World . Basic Books , Inc . Publishers . 1986 .
Trivellato , Francesca . “ Credit , Honor and the Early Modern French Legend of the Jewish Invention of Bills of Exchange .” The Journal of Modern History . Vol . 84 . No . 2 . June 2012 .
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