Who Powered the Renaissance

In reading about the renaissance, I always wondered why the renaissance flowered in florence. What led so many creative people to come together in a town of 40,000 people in the 15th century there? I found the answer in Warhol‘s quote, “Making money is art and working is art and good business is the best art.

“In 1397, a group of 17 family bankers came together and in their art of making money, they powered the renaissance. They made three innovations in the field of banking that revolutionized banking are used by economists today on a daily basis for work. First, with the mercantile class was booming across Europe the Mediterranean, and the Silk Road trading expensive goods such as silk, cloth and spices the Medicis developed the method of double-entry bookkeeping. ‘Assets = Liabilities + Equity’. Recording both credits and debits, makes an easier overview of what money the business has, and where. It helped bankers and merchants keep a more accurate account of their financial decisions- and was a simple yet hugely effective trick which helped the Medici build their reputation for reliability. Today, nearly all businesses use the double-entry bookkeeping method of accounting.

Second the concept of a ‘letter of credit’ was one of the most important financial mechanisms that allowed international trade to flourish in the 15th century. As caravans wheeled, and ships sailed around Europe distributing fine goods, the letter of credit became a necessity for travelling merchants. A letter of credit is an agreement in which the buyer’s bank guarantees to pay the seller’s bank at the time goods/services are delivered. They would be authorised to receive pounds in the London branch, for example, at 40 pence to the florin exactly 90 days after (the timing was always fixed).Shipping large sums of money over land on a regular basis was too dangerous during this era. For this reason, traders would deposit florins (the Florentine currency of the day) in a Medici bank for a letter of credit.

Third to circumvent the social norms of the time and avoid “usury (the lending of money for interest) which was a cardinal sin. A letter of credit was one of many ways they could disguise the interest within transactions, and refrain from angering the theocracy.Continuing our example from above, the London branch of the bank would then turn around and find someone wanting 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 cunning Medicis a 22% annual return. In the eyes of the contemporary theologian, this was a currency exchange rather than a sin, absolving them of the judgment of God, whilst making a tidy profit.