Reviled to Revered

In his book, The Ascent of Money, Niall Ferguson uses Shylock (from The Merchant of Venice) as a representative of how money lending worked in the pre-banking era in the West. Say, a merchant in Venice expected to make money by some activity in the future, but he needed money today to get started. He’d need to borrow it. But the lender ran the risk that this merchant might fail, or run away, or refuse to repay. To compensate for these risks, the lender wanted a premium to be paid, what we could call “interest”.

 

But Christianity forbade usury – the charging of interest. That, and the fact that Jews were not allowed to hold property in Europe, meant Jews became the only group who could lend money. With high interest since each money lender was small and couldn’t spread his risk across too many loans, the way modern banks can. Also, without a strong legal system, some form of force (or the threat of it) was needed to get back the money. Add to this the Jews were a minority, and you can see why they were a reviled lot, which is why:

“Though fictional, the story of Shylock is therefore not entirely removed from Venetian reality.”

 

Banking in Europe was born with the Medici family. They were Christians, so how did they overcome the ban on usury (charging interest)? They came with a different business model! In a continent full of different currencies across its different kingdoms, one needed to convert money from one to the other, for which the Medici would charge a transaction fee. A merchant who bought raw materials in one city might hope to make profits in the future in another city. Well, he could issue an I-owe-you kind of note. But who’d trust that? Enter the Medici – they could serve as the issuers of such notes. For a fee, of course. Even better, they allowed these notes to be bought and sold. So if the lender needed money early, he could sell the note to someone else at a slightly lower price, with the Medici bank pocketing a part of the transaction fee.

 

The Medicis scaled their operations immensely and were enormously successful in what they did. So much so that every ruler in Europe needed to turn to them to fund his wars or domestic needs. Some of that wealth the Medici used to finance artists and sculptors in their hometown of Florence, including famous names like Botticelli, Leonardo da Vinci, and Michelangelo. Not surprisingly then, it turns that in Botticelli’s famous Adoration of the Magi:

“The three wise men (in the painting) are all Medici.”

As also are many other figures in that painting. Which is why Ferguson says:

“It should perhaps have been called The Adoration of the Medici.”

 

All of which is why Ferguson ends this part of his narrative saying:

“Having once been damned, bankers were now close to divinity.”