Carlos Fernandes In today’s financial world, some people are looking back to the Medici Bank. It was one of the strongest banks in Europe many hundreds of years ago and it belonged to a famous Italian family. However, it failed because customers didn’t know that they were using something called fractional reserve banking. This is an old way of banking that many banks stopped doing a long time ago.
The Risks of Fractional Reserve Banking
In March 2023, three important banks closed down. This made people start thinking about the risks connected to something called fractional reserve banking. Basically, when a bank does fractional reserve banking it only keeps part of the money deposited with them in their own safe and uses the rest of the money they get to loan or invest. A long time ago – back in 1397 – there was a famous Italian bank, called “The Medici Bank”, that was one of the first ones to practice this type of banking.
The Medici Bank was a very successful and influential financial institution in Western Europe that had been around for almost 100 years. It grew quickly, established several branches all over the continent, and was even more powerful than the famous bankers of the early 20th century such as J.P. Morgan and Jacob Schiff. Sadly, despite its success, it eventually closed after closing its doors due to bankruptcy.
In 2015, Philip J. Weights from the Swiss Finance and Technology Association wrote a post where he talked about how too much lending and not enough reserves caused the Medici Bank to fail. A book from 1963 by Raymond De Roover called ‘The Rise and Decline of the Medici Bank (1397-1494)’ gives us more information – it said that right when the bank started, they already didn’t have enough money saved up (reserves were less than 10% of deposits). This lack of savings is what doomed the bank eventually.
The book tells us about a bad time in the Medici Bank’s history. From 1463 to 1490, they got themselves into trouble with shady and corrupt banking. This caused some of their branches to close down and be sold off to other banks. Francesco Sassetti was one bankers but even he couldn’t stop it from happening. According to the book, many people at the time were taking out loans and charging high-interest rates.
A Medici Bank ledger is like a special kind of list that keeps track of all the people and businesses that owe money (debtors) and those to whom money is owed (creditors). This system was created by The Penn Libraries’ Colenda Digital Repository.
The Medici family owned a bank in Florence, Italy and they kept their money as gold coins called “Florins”. People were not happy with how the Medicis ran their bank because there wasn’t enough money. In 2018, someone wrote an article about how the Medicis had lots of money coming into their bank – they made money by offering loans and charging high interest rates. But then something bad happened: Cosimo Medici died so the bank was never quite as successful after that.
In 2023, three major banks fell and Jim Bianco, the president of a company that helps people with investments, talked about fractional reserve banking. This type of banking was created during the late 15th century in Florence by the Medicis. He connected this to two famous films from years ago: “Mary Poppins” and “It’s a Wonderful Life”, both showing instances of what we’re dealing with today.
Bianco said that the struggles related to our banking system aren’t something new. In fact, it has been like this for hundreds of years.
Managing Money in the New Era
Bianco said that double-entry bookkeeping was the way the Medici Bank had their own system for banking. This kind of bookkeeping uses a ledger which lists both what you owe and what other people owe you. Luca Pacioli, a Franciscan Friar, wrote a book about double-entry accounting with help from Leonardo da Vinci. They did not invent the system but by their research, it became more common to use this type of bookkeeping – and it is still used in today’s world!
Many years ago, Luca Pacioli changed the way that money could be managed and his system helped the Medici Bank to easily split up its reserves. In more recent times, Satoshi Nakamoto has also made a big change in how we deal with finances with Bitcoin’s triple-entry bookkeeping.
Giovanni de Medici used a new concept to help manage his family’s bank. It allowed the House of Medici to do more with less money and let them lend out even more money until they ran out of it. 600 years later, someone wrote a paper that revealed something called triple-entry bookkeeping. This involves recording debits and credits plus having a third party to verify that the numbers are correct – like adding an extra check in the system.
Satoshi Nakamoto has created a system of accounting that is very difficult to manipulate. Before this, double-entry bookkeeping was used, which could be forged and changed. Now could perform triple entry bookkeeping with much greater security. Even though bankers operate in a similar way today as when the Medici did, Nakamoto’s invention still offers an exciting opportunity for transformation, just like double-entry bookkeeping did when it first appeared.
Do you have any ideas or lessons from the closing of the Medici Bank? Let us know by leaving a comment below.
Picture Credits: Shutterstock, Pixabay, Wiki Commons
