But, because the monarchs simply weren’t answerable to anyone, they also carried peculiar risks. Piero de’ Medici, son of Cosimo de’ Medici, warned his own son, Lorenzo the Magnificent, not to make loans to monarchs, as they involved more “risk than profit.” Lorenzo ultimately lost much of the family fortune by ignoring his father’s advice: The head of his Bruges branch made massive loans to Charles the Bold, the untrustworthy Duke of Burgundy, who died with so much unpaid debt it eventually unraveled the Medici bank. (Lorenzo realized that the Medici would fare better as princes and popes rather than bankers: His son Giovanni de’ Medici would become Pope Leo X in 1513.)
These kinds of collapses would become a pattern. As European banking grew, it crashed time and again into the practices of its royal clients. The wealthiest bankers of the 16th century were the Fugger family of the Bavarian city of Augsburg, who had built their unparalleled fortune on international trade, a pan-European mining operation, and a banking network almost three times the size of the Medicis’. To maintain this financial and industrial empire, they were obliged to lend money to the Hapsburg Holy Roman Emperor, Charles V, and his son Philip II, king of Spain. On the face of it, being bankers to the Spanish Empire offered vast rewards from the tons of gold and silver that were arriving from South America. But the overextended Philip struggled to manage his finances, and indeed refused to even look at his ledgers, deeming it beneath him. With its imperial debts outstanding, the giant Fugger bank began to falter, and the family retreated from finance. (A counterexample would eventually emerge in the Rothschild dynasty, which succeeded in banking to kings—in part by building an international asset network whose secrecy and inscrutability rivaled any monarch’s.)
Banking ran into a different kind of obstacle in France. The French monarchy became the biggest and most powerful in Europe, but was plagued by financial mismanagement and massive debt. In 1720, with the monarchy effectively bankrupt, the ruling regent tried to create a modern bank and currency system with the help of the Scottish financial innovator and gambler John Law. The results were quick and dire: With no accountability, and no venue for political debate about France’s monetary policies, the French Royal Bank became tangled in Law’s secretive pyramid scheme, known as the Mississippi Bubble. When both the bubble and the bank crashed in 1720, the monarchy and the public lost all confidence in banking; the regent shut down the Royal Bank and the French stock exchange. France would not succeed in creating a true national bank until 1800.
Where European banking flourished, it tended to be in the freer air of nations like Holland and England. Holland was a republic with an open political system, famous for its freedom of information and religion. England, by 1688, had a constitutional monarchy in which state financial matters were negotiated and debated publicly in Parliament and in the nascent press. Even more, these nations had relatively open financial institutions. The Bank of England was established in 1694 and is still healthy, despite scandals from very early in its history. When the English South Sea Bubble burst in 1720, in which the Bank of England was partially implicated, there was a public inquiry that led to reforms—and, unlike in France, the survival of the British central bank and stock exchange. The Bank of England ultimately allowed the British government to manage its enormous debt and outpace France in military and colonial spending.
In the last year , the Vatican Bank has made some moves in the right direction—last year its board stepped in and fired chief Ettore Gotti Tedeschi, accused of money-laundering by the Italian authorities. But with no voters or regulators to answer to, the bank and its patron state still share more characteristics with the closed monarchies of the past than with the open systems that survived them. And it is unlikely that its nominal head, Francis I, will want to put his nose deeply in the books.
Though the Vatican’s model of finance would seem long obsolete, there are ways that modern banking is now moving closer to that old value system. China’s most powerful banks are largely black boxes, beholden to a regime rather than to empowered shareholders. The West’s top banks have grown into some of the world’s wealthiest international entities, capable of hiding debts and obligations in much the same way monarchial governments did. And bankers have acquired, like absolute monarchs, an aura of unaccountability, with the ability to tamp down regulation and avoid culpability. So far, for instance, not a single American banker has gone to jail for the 2008 financial debacle.Continued...