Way back in 1999 I visited Florence and I remember being amazed by the trappings that the Medicis accumulated (I also thought it oddly ironic that the Ufizi gallery translates literally as “office”).  What’s I’d always wondered was: how did the Medicis make so much cash and where did they go?

I’ve finally figured it out after reading Medici Money by Tim Parks.  Here’s the gist of it: the Medicis made their money through financing trade.  It was too dangerous to ship vast sums of money over land so merchants would put Florins in a Medici branch in Florence for a letter of credit.  They would be authorized to receive pounds in, for example, the London branch at 40 pence to the florin exactly 90 days hence (the timing was always fixed).

The London branch would then turn around and find someone to purchase florins in Florence, but at the rate of 36 pence to a florin (currencies traded in different rates home and away).  This little difference of 4 pence per florin gave the Medicis a 22% annual return.  If they couldn’t balance trade (e.g., wool from England with silk via Florence) they’d pass the capital through one of their other branches in Milan, Venice, Rome, Geneva (then Lyon), Avignon, Barcelona or Bruges.

This proved to be immensely profitable.  To give you an idea of how profitable this was, consider the value of a florin.  There were two currencies in Florence: the Florin and the piccioli.  The merchants accepted trade in florin and paid wages in piccioli (and since they also controlled the Mint they tended to steadily reduce the value of a piccioli: in 1252, 20 piccioli got you 1 Florin; by 1500 it required 140).

A leek cost 1 piccioli, an arm of cheap cloth was 9 piccioli.  One florin got you a barrel of wine; half a florin for the astrologer.  Two and a half florins meant that the cheap cloth became Damask silk.  A mule or a slave girl was about 50 florins-or you could get a maid for 10 Florins a year.  20 florins paid the wages of the bank’s apprentice.  A small townhouse (with a garden) or an office could be rented for 35 florins per year.  A palazzo cost 1,000 florins to build but only 20 to cover in a fresco.

Given these prices, the profits of the Medici bank were stunning.  From 1397 to 1420 (the early period when Giovanni di Bicci founded the bank), annual profits were 6,644 florins.  From 1420 to 1435 they made 11,648 a year and this jumped to an astounding 19,386 annually between 1435 and 1450 as Cosimo ran the bank.

However, by 1494 it was all over.  The bank had collapsed and the Medicis had fled.  What went wrong?  Well, put in business jargon: agency costs.  During its heyday the Medici bank had used a holding company structure to ensure that each of its bank branch managers were also owners.  However, they restructured and installed mere employees (or worse-family members) as heads.

Over time the Medicis became more interested in cultivating the excesses of Renaissance life and paid less attention to the bank.  In turn, the bank heads became more lax, focussed more on building pretty branch buildings and lending money to royalty (who were fun to hang out with but unlikely to repay).

However, all was not lost for the Medicis.  Seems like Lorenzo, the last of the bankers (and pictured above), was able to get one of his sons (Giovanni) installed as Pope Leo X.  While he would do such a bad job as Pope as to inspire Martin Luther, he helped lead the path for the Medicis to become Italian Dukes, completing the family’s journey from mere middle class-dom to nobility.