The Black Death and bankers

By Mike Foster

The result of the first French presidential vote, the collapse of the Dutch coalition government and riots in Spain suggest voters are getting more than a little weary of the European project.

Where cross-border euro loans once gave people access to cheap finance, the ability of people to repay their debts is in question. The region’s moneylenders, never popular, face a problematic future, as voters start to toy with the idea of reneging on their debts.

You need to go back to the 14th century to find a period when bankers conducting business across Europe were as unpopular as the current lot. And, that time round, it was the bankers of Lombardy who held King Edward III of England in their thrall and the King of Naples at their mercy.

In those days, the most powerful of them were located in Florence. They were led by the Bardi, Peruzzi and Acciaiuoli families although many other families, some in Venice, colluded.

The banks were in an exceptionally powerful position, according to author Paul Gallagher. “There were as yet no nations. No government had the national sovereignty to control the banks and the creation of credit.” To fight their wars, kings had to offer the banks control over slices of their government’s revenue and the banks gained influence over nations by way of return. If the kings wanted to retain access to finance, they needed to play ball. At least until recently, the French felt much the same way about the Germans.

Edward III wanted money to fight his war against the French, and the bankers of Lombardy saw an opportunity to demand tough terms. Their revenue, after all, was far larger than his. For loans, they negotiated a monopoly in trading English wool and offered the king credit on terms which implied a 15% devaluation of the English coin. The king tried to start up his own line of credit, but it was refused by the Florentines and he chose to default.

In 1325, the Peruzzi bank owned most of the revenues produced by the Kingdom of Naples, agreeing to pay its army out of the proceeds and Naples also defaulted in due course. Elsewhere, the bankers did well out of Hungary and cooperated in the exploitation of France. Castile fell prey to them. Northern Italy was in their power. The Vatican leaned on them for support.

According to Edwin Hunt’s book The Medieval Super-Companies: A Study of the Peruzzi Company of Florence, there were few limits to the power of the bankers. “They used loans to monarchs to dominate and control trade in certain vital commodities, especially grain and later wool and cloth.”

Their influence over the commodities markets was further enhanced by trade finance, which Peruzzi & Co dominated. Seafarers from Venice seeking finance helped put more of Europe, and some of Asia, in the thrall of Lombardy bankers. Achieving scale to beat the opposition was as important then, as it is now, often with fatal results.

The 1330s were a prosperous period for Europe, when the power of the bankers reached its zenith. Farmers were keen to take advantage of rising commodity prices, and offered the bankers of Florence generous terms to get loan capital. The bankers also connived in a rise of taxes in rural areas, where they had political influence.

But the cost of loan capital contributed to a collapse in the rural economy as the Black Death started to make its presence felt, carried by rodents brought to Europe from the east on the ships funded by Lombard loans. Local wars did not help – they never did.

One by one, creditors collapsed, and the Peruzzi, Bardi and Acciauoli banking groups followed. In the decades that followed, Europe’s population crashed from 90 to 60 million as a result of the Black Death.

Over the years, Europe’s monarchs expelled the bankers of Italy from their lands. Shakespeare’s Shylock became (quite naturally) a merchant of Venice. Everyone vowed never to let the bankers have such influence again.

But banking is a highly profitable business. In the good times, the thirst for their services is great.

By 1390, the Medici family was building a new banking empire in Florence. And, whatever happens to the euro, there is already no shortage of financiers poised to take advantage of the situation.