I’d like to bring up a subject that’s been on my mind for some time. If you’re expecting and hoping for useful investment commentary from here on out, you can stop reading. If, however, you’re a young and ambitious banker making your way through the ranks at one of Australia’s big four banks, you may find what follows useful. It’s about the relationship between credit booms and political power.
You’ll recall that earlier this week I posed the question of whether the modern nation state is affordable. You could also ask whether it’s ‘sustainable’, in terms of the resources, energy, and authority required to keep a mega-city from tearing itself apart through starvation. But for today, let’s stick with the relationship between banking and the formation of political power.
Our story takes us back to 13th century Italy. Italian city states like Siena, Piacenza, and Lucca were just pulling themselves up out of the muck and mire of the collapse of the Roman Empire. There is a lot to collapse in an Empire. And from the collapse of the Western Empire in 476 AD to the early 13th century, there wasn’t a lot of credit growth, progress, or civilisation going on.
The ‘Gran Tavola’ helped change all that. It was founded by a Siennese Banker named Orlando Bonsignori. The Italian Merchant Banks began, like all great and respectable fortunes, through voluntary and mutually beneficial trade. The Merchant Bankers were merchants first and bankers second.
As merchants, they engaged in trade to create a profit. That profit was surplus capital. That’s when they became bankers. As the Italian city states began to trade with the Middle East and reconnect the old Empire to the world, they effectively recapitalised Italy, or at least parts of it.
But making money is the easy part. Investing it is harder. The banks had an option. They could use their surplus capital to finance more trade. That would create even more profit. But the trouble with trade is that you can fail. Sea-borne trade was especially dangerous. You had wars, weather, and pirates to deal with.
The Bonsignori family hit on the idea of providing finance to the Papal States. Lending money to political powers, especially those with a monopoly on religious authority and the use of force, seemed like a much safer way to bank the profits of trade. Thus, the Merchant Banks became the main financiers of the Papal States and of secular powers like Frederick II of the Holy Roman Empire and Charles of Anjou.
Yes, it’s a little far afield. But if you bear with me, in tomorrow’s Daily Reckoning I’ll show you how the financing of medieval political power has evolved. Today, banks are more powerful than ever, not least because nation states have expanded their reach into public and private life to record levels. Have they over reached? More tomorrow.
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