As Pope Francis sets the course for his young papacy, one of his first challenges has nothing to do with theology or the behavior of the far-flung priests and bishops he supervises: It is to reform the troubled Vatican Bank. A private and highly secretive institution estimated to control more than $7 billion in capital and more than 33,000 secret accounts, the Institute for the Works of Religion (its official name) has long been dogged by scandals and questions.
Founded in 1942 to “safeguard and administer” the funds of church members, it has become a modern symbol of the hazards of secrecy in finance. It was accused of holding Croatian Nazi funds during World War II and more recently has faced continued suspicions of money laundering for the mafia.
Publicly, at least, the bank is making efforts to push back against this reputation. Ernst von Freyberg, who became the bank’s chief in February, has characterized it as “very, very safe,” and pledged to clean up the scandal-racked institution. He has retained an American law firm to help the bank meet international anti-money-laundering and terrorism finance standards.
But if history is any guide, Francis and von Freyberg face a difficult task. Effectively, the pope is the last absolute monarch in Europe, a single individual with total authority over the city-state’s government—and this extends to its banking arm, which he personally oversees with the help of two boards of advisers. The Vatican is essentially trying to run a modern bank within a monarchy. No matter how sincere reformers of the Vatican Bank are, they are up against an age-old problem: The long history of European banking suggests that secretive, absolute government and long-term successful banking do not coexist well.
From the 1300s to the modern era, absolute monarchs—unaccountable to boards, investors, and even their own people—have had a poor track record of managing money, paying debts, and managing banks within their borders. Some of Europe’s most powerful banks foundered and even collapsed when confronted by the unpaid debts of the monarchs they lent to; others failed simply because they had trouble gaining trust from financiers and merchants within a system that didn’t require openness.
The incompatibility of banking and monarchial secrecy is more than just a problem for the Vatican. As banks themselves rise in financial and governmental power—and as secrecy, opacity, and impunity come to define modern finance—it is tempting to wonder whether banks themselves are starting to embody many of the same risks of the monarchies that once endangered them, and thus jeopardizing our financial stability in ways that Europeans of previous times would have found entirely too familiar.
The Vatican’s entwinement with banking goes deep into history; in fact, modern banking as we know it actually has its origins in the Medieval papacy. In the Middle Ages and Renaissance, the Apostolic See (as papal government is called) was among the wealthiest entities in Europe, with complex financial needs. The church transferred funds to and collected taxes from every corner of Europe. The money was used to hold multiyear council meetings; to build palaces, churches, charitable organizations, schools, shrines, and libraries; to bankroll its imperial courts and diplomatic corps; and to raise large armies to defend its territories.
Beginning in the 1300s, however, instead of operating its own bank, the papacy relied on the outside banking houses that had arisen in Italy, the Medici house foremost among them. These family-run banks flourished by following some basic rules. Unlike the popes and kings of his day, banker Cosimo de’ Medici maintained strict training, professional rules of financial management, and internal and external accountability, keeping clear double-entry books that balanced income and expenditure. He performed audits on his branches and was forced to submit his own books (albeit a set specially prepared to be appropriately modest) for the Florentine tax assessors.
Modern finance and accounting was one of the great societal leaps of the Renaissance, and as banks spread through Europe, they helped fuel trade, industry, and art across the continent. They also amassed great pools of capital. Like popes, kings and other great nobles did not do their own banking, and they began turning to the heavily capitalized Italian and German banks to provide funds. To banks, the royals were tempting clients, often deep in debt from wars and maintaining their sumptuous courts. Loans to monarchs were enormous and potentially very profitable, and they brought banks prestige and an entrée into national markets.Continued...