How a Florentine Family Invented Modern Finance and Then Blew It Up

A mob burns Europe’s biggest bank

In the autumn of 1494, Florence was on edge.

A French army led by King Charles VIII of France had crossed the Alps. Charles had a vague legal claim to the throne of Naples in southern Italy, and in typical late-medieval fashion, he decided to enforce that “right” with soldiers. Italian city-states – Florence, Milan, Venice, Naples, the Papal States – were all small, rich, and politically fragile. When a big foreign king walked in with guns, everyone panicked.

Inside Florence (then an independent republic in what is now central Italy), the ruling Medici family was already unpopular. For about 60 years, they had been the richest bankers in the city and, unofficially, its political bosses. They didn’t wear crowns, but their money bought them more influence than most kings had over their nobles.

At the same time, a Dominican friar named Girolamo Savonarola was preaching fiery sermons. His message was simple: Florence had become corrupt and obsessed with luxury; God would punish it if it didn’t repent. The Medici – art-loving, palace-building, power-brokering bankers – were the obvious symbol of that excess.

When Charles VIII’s army neared the city, the Medici leadership hesitated. They didn’t resist strongly. They didn’t negotiate decisively. To many Florentines, it looked like weakness and self-interest. The political balance snapped. Crowds gathered. The Medici were pushed out of the city.

One of the targets of the anger was not just their palaces, but their bank.

The Medici Bank wasn’t a single building with tellers and a vault. It was a network of partnerships: branches in Florence, Rome, Venice, Milan, Pisa, Lyon (in modern France), Avignon (in southern France), Bruges (in today’s Belgium), and London (in England). These sat exactly where the main trade and political flows of Europe crossed: English wool, Flemish cloth, Italian luxury goods, papal taxes, royal debts.

The Florentine “head office” kept the books and held the central capital. That was the symbolic heart of the system. In 1494, an angry crowd stormed it and burned its records.

By then, the bank was already damaged. Several foreign branches had taken big losses. Others were being quietly wound down. The French invasion and the Florentine revolt didn’t kill a healthy bank. They just finished off a machine that had been undermined for decades by bad incentives and political entanglements.

To see why this story matters now, we need to go back a century, to a wool-and-cloth town trying to solve a basic problem: how do you move money, trust, and risk across a world that hates interest and has no central banks?

Background: Florence, wool, and money without “interest”

Florence: a rich, tense city-state

Around 1400, Florence was a wealthy city-republic in what is now Tuscany in Italy. Think of a compact urban area with perhaps 60–100 thousand people – big for medieval Europe, but about the size of a modern mid-sized city.

Its wealth came mainly from two pillars:

• Textiles – especially wool cloth.
• Banking and trade finance.

The wool industry worked on what historians call a putting-out system:

• Big entrepreneurs (called lanaioli) bought raw wool, often from England.
• They organized the process into steps: washing, carding, spinning, weaving, finishing, dyeing.
• Thousands of workers – often working from their homes – did each step for piece-rates.

If you were a poor spinner or weaver, your life was fragile:

• An unskilled worker might earn something like 8–12 small silver coins (soldi) a day.
• The main gold coin, the florin, could be worth the rough equivalent of one or two weeks of basic labor.
• One bad harvest, one illness, one missed payment from a merchant could ruin you.

Above them were guilds – powerful organizations of craftsmen and merchants that controlled entry into trades, standards of quality, and, crucially, city politics. Florence was formally a republic, but in practice guild elites and rich families ran it.

People lived close together, worried about:

• War between city-states: small armies, mercenary captains, shifting alliances.
• Plague: after the Black Death of the mid-1300s, new waves of disease kept coming; whole streets could empty out in weeks.
• Religious sanctions: being excommunicated by the Church could cut you off from business and community.

This is the environment in which the Medici Bank appears: high commerce, high risk, thin social safety nets.

The religious problem: Christianity vs interest

The core economic problem was simple: trade needs credit, but medieval Christian doctrine formally banned usury – charging interest on loans.

The Church’s logic was theological: money was “sterile”; lending money and demanding more back was seen as exploiting time, which belonged to God. In reality, everyone understood that commerce couldn’t work without advances of money and delayed repayment.

So merchants and bankers built workarounds:

1. Bills of exchange (letters of credit). Imagine you’re a merchant in Bruges, in Flanders (a rich trading region in what is now Belgium and the southern Netherlands). You want to pay a cloth producer in Florence.

   • You deposit local currency with a Medici agent in Bruges.
   • You receive a written order – a bill of exchange.
   • You send that to your contact in Florence.
   • The Medici office in Florence pays out in florins.

   The Medici don’t say “we charged you 10% interest”. They say, “We sold you florins at this exchange rate.” The spread between the rate they pay and the rate they charge hides the return. Functionally, it’s a loan plus foreign exchange; legally, it’s a currency deal.

2. Profit-sharing partnerships. Instead of “I lend you 100 and you pay me back 110,” contracts might say: “I provide most of the capital for this venture; you manage it; we split the profits and losses.” That looks like equity, not a fixed-interest loan.

3. Contract design tricks. Late-payment penalties, bundled sales, and complex terms were often used to mimic an interest rate without naming it.

On the liability side, banks took deposits from:

• Wealthy individuals.
• Guilds.
• City governments.
• And, crucially, the papacy – the Pope and his administration, who collected taxes and tithes across Europe.

The Pope’s financial needs were huge. The Church taxed kingdoms, sold Church offices and indulgences, and funded wars and building projects. Moving all that money around without trucks, SWIFT, or modern states required trusted private bankers.

Now put yourself in a depositor’s shoes in 1400:

• There is no deposit insurance.
• There is no central bank to act as a lender of last resort.
• Courts are slow, especially across borders.
• Kings can change the rules and default on you.

Banking is a trust game. You are effectively lending your savings to a small group of men with ledgers.

That’s the first big principal–agent problem in this story [MODEL: Principal–agent problem]:

• The principals (depositors, investors, even the Pope) provide the money.
• The agents (bank partners, branch managers) decide what to do with it.
• The principals can’t easily see what’s going on inside the books.

The Medici Bank is interesting because it was one of the first to scale this game across most of Western Europe – and to build real tools to reduce that trust gap.

Act I – Giovanni di Bicci: Building a cautious bank in a dangerous world

The story starts with Giovanni di Bicci de’ Medici (c. 1360–1429).

He didn’t begin as a titan. The Medici name existed, but the family was not yet dominant. Giovanni trained in the bank of a more distant relative, Vieri di Cambio de’ Medici, one of Florence’s important late-14th-century bankers.

Giovanni had front-row seats to a wave of earlier banking failures. Large Florentine houses like the Bardi and Peruzzi had collapsed in the 1340s, in part because they had lent huge sums to the kings of England. When those kings defaulted or delayed, the banks died.

Giovanni learned a simple, hard lesson:

Lending big sums to kings looks prestigious but is terrible risk.

When Vieri’s bank was wound down and split into pieces, Giovanni ended up controlling some parts, including a Rome branch dealing with the papal court. In 1397 he reorganized his portion into a separate partnership in Florence. Historians usually date 1397 as the founding year of the Medici Bank.

He started with capital on the order of 10,000 gold florins. For scale: that’s like hundreds of worker-years of income – the savings of a small city inside one firm.

Giovanni made two core strategic choices:

1. Lean into papal business. He focused on being a reliable banker to the Pope. That meant:

   • Handling Church tax receipts from across Europe.
   • Moving funds between cities.
   • Paying out pensions and stipends to Church officials.

   This was both profitable and high-status. If the Pope trusted you with his money, so did most others.

2. Ban lending to princes. Giovanni set a rule: his bank would not make large, unsecured loans to kings and secular rulers. In later branch instructions, you see explicit bans on lending to “temporal lords”. He knew that kings could not be forced into bankruptcy court.

This is good expected value thinking [MODEL: Expected value]. The headline profit on a royal loan might look juicy, but the probability of disaster is high, and your downside is huge.

Giovanni also innovated on structure and accounting.

Branch partnerships with skin in the game

Instead of one big monolithic firm, the Medici used a hub-and-spoke partnership model:

• The Florence “head office” was the main partnership.
• Each branch – Rome, Venice, later Geneva, Bruges, London, Milan – was a separate legal partnership.
• Florence put up the majority of the capital in each branch and had the right to dissolve and restructure it regularly.
• The local branch manager had to invest some of his own money and was paid mainly through a share of profits, not a simple salary.

This did a few things:

• It gave local managers strong skin in the game [MODEL: Skin in the game]. If they took stupid risks, they lost their own capital.
• It gave Florence control: majority ownership and contractual power to shut down or reshuffle a branch each year.
• It allowed risk to be partitioned: if one branch blew up, in theory the loss would be contained.

On top of this, the Medici were early, heavy users of double-entry bookkeeping:

• Every transaction is recorded twice: as a debit in one account and a credit in another.
• The total debits and credits must always match.
• Balance sheets show, at a glance, the firm’s assets (what it owns or is owed), liabilities (what it owes others), and equity (the partners’ residual claim).

For medieval Europe, this was information technology. It reduced errors, made fraud slightly harder, and gave owners visibility across multiple branches.

Each year, normally on March 24, every partnership was formally dissolved on paper:

• The books were closed.
• Profits and losses were calculated.
• Partners’ accounts were updated.
• Then, usually, the partnership was re-formed with adjustments.

This annual reset was a built-in control loop: a regular point to say “do we still trust this manager?” and “should we change the terms?”.

By the time Giovanni died in 1429, the Medici Bank was not yet a giant, but it was:

• Profitable.
• Well-regarded by the papacy.
• Structurally more disciplined than many rivals.

He had built a cautious, well-governed machine in a dangerous environment.

Act II – Cosimo: From solid bank to European network

Giovanni’s son, Cosimo de’ Medici (Cosimo the Elder), took over and started playing a bigger game.

Cosimo understood banking, but he also understood politics. Florence was formally a republic with rotating councils, but in practice factions and families fought to control those institutions. Cosimo used money as his main political weapon: loans, favors, bailouts, and public spending.

Building the branch network

Under Cosimo, the bank expanded into a European network:

• Rome (Papal States, central Italy): papal finance hub.
• Venice (northeast Italy): gateway to eastern Mediterranean trade.
• Geneva, later moved to Lyon (both in modern France): fair cities linking Italian and northern trade.
• Bruges (in Flanders, now Belgium): major northern European cloth market.
• London (England): close to English wool producers.
• Milan (northern Italy): tied to northern Italian politics and trade routes.

By the mid-15th century, Medici branches sat on top of Europe’s main trade routes:

• English wool and cloth → Bruges and London.
• Italian cloth, silk, and luxury goods → Venice, Florence, Lyon, Bruges.
• Papal revenues → collected everywhere, concentrated through Rome and then redistributed.

Here’s where network effects start to matter [MODEL: Network effects]:

• The more cities the Medici covered, the more valuable they were to each merchant. A merchant who dealt with multiple regions could use one banking network instead of juggling several small local houses.
• The more business they handled, the more information they got about prices, creditworthiness, and politics – which made them better lenders and more reliable for the Pope and governments.

Cosimo also integrated industry into this network.

Banking plus cloth plus silk

The Medici owned or controlled wool and silk workshops in Florence:

• Wool: buying raw English wool, producing high-quality cloth.
• Silk: importing raw silk (often from the eastern Mediterranean), spinning, weaving, dyeing.

The bank financed these operations and used its branches as distribution and sourcing nodes:

• The London and Bruges branches bought English wool and helped market Medici cloth.
• Venice helped source eastern goods and silk.
• Credit lines smoothed cash flows up and down the production chain.

This is classic vertical integration and economies of scope:

• Vertical integration: controlling multiple stages of a value chain (input → processing → finance → distribution).
• Economies of scope: using the same infrastructure (offices, people, knowledge) to run several related businesses more cheaply than if they were separate.

The same office that:

• Handles bills of exchange.
• Moves papal funds.
• Can also arrange wool purchases or sell cloth for Medici factories.

Cosimo used the bank’s profits to build political capital:

• Funding city defenses and public works.
• Bailing out allies’ debts.
• Commissioning art and architecture – churches, palaces, sculptures.

By the 1430s–1450s, he was effectively the boss of Florence: not an official duke, but the man who decided who got credit and who didn’t.

This created a reinforcing feedback loop [MODEL: Reinforcing (positive) feedback loops]:

1. Profitable banking → more money for patronage and loans to allies.
2. Patronage and loans → more political control.
3. Political control → better business opportunities (papal contracts, monopolies, protection).
4. Better business → more profits.

It looked self-sustaining. For a while, it was.

Act III – God’s bankers and the alum monopoly

If you want to be the top bank in 15th-century Europe, there is one client you really want: the Pope.

Papal banking: private payment system for a supranational state

The papacy wasn’t just a religious institution. It was also a trans-European fiscal machine:

• It collected:

  • Tithes (a kind of Church tax).
  • Special taxes for crusades and wars.
  • Payments for Church offices, dispensations, indulgences.

• It spent:

  • On administration in Rome.
  • On wars and diplomacy.
  • On building projects and patronage.

The Pope ruled the Papal States – territories in central Italy, including Rome – but his income came from everywhere: England, France, Germany, Spain, Poland.

Before large banks, papal agents moved money by:

• Sending couriers with cash.
• Using small local moneychangers.
• Waiting months for funds to arrive.

With big banking houses like the Medici, the Church could:

• Tell local collectors in, say, London or Bruges to deposit funds with the local Medici branch.
• Have the Medici credit the papal account in Rome.
• Or instruct the Medici to pay out money somewhere else (for example, to a friendly prince fighting a war on the Pope’s behalf).

This is early shadow banking: private banks providing payment, clearing, and credit services for what is effectively a state-level actor.

From the Medici’s point of view, papal business:

• Provided large, steady flows of deposits.
• Gave them prestige and political leverage.
• Offered opportunities to invest idle balances in trade or credit.

But it also created concentration risk:

• If the Pope defaulted or delayed, or shifted favor to another banking family, you could lose a huge chunk of your business.
• If you accepted equity or monopoly concessions in place of cash repayments, you concentrated even more risk.

That’s exactly what happened with alum.

Alum: a chemical chokepoint

Alum is a chemical salt. In medieval Europe, it was critical for:

• Preparing wool and cloth.
• Fixing dyes to fabric so colors wouldn’t wash out.
• Some tanning and glassmaking processes.

If you control alum, you control a chokepoint input for the textile industry [MODEL: Chokepoints].

For a while, much of Europe’s alum came from mines in Asia Minor (roughly modern Turkey), under Ottoman control. That meant Christian Europe was dependent on a strategic raw material from an often-hostile power.

In the 1460s, rich alum deposits were discovered at Tolfa, in the Papal States north of Rome, near the port of Civitavecchia on the Tyrrhenian Sea. The Pope saw a chance to:

• Reduce dependence on Ottoman alum.
• Make money by selling a Christian alternative.

A company was set up to work these mines. The papacy granted monopolies and trading rights. The Medici became major financiers and shareholders in this alum venture.

At one point, to deal with overdue papal debts, the Medici accepted extended control over alum production and marketing instead of cash. In other words, the Pope said, “I can’t pay you all I owe; take a large stake in this strategic commodity instead.”

On paper, this was brilliant:

• It fit the Medici’s vertical integration: they already financed wool producers and owned cloth and silk businesses.
• It strengthened their papal relationship.
• It gave them a semi-monopoly on a crucial industrial input.

This is a form of cornered resource [MODEL: Cornered resource]: controlling a crucial input that competitors can’t easily access on equal terms.

But it also made the Medici even more dependent on:

• Papal politics.
• The alum market.
• And the ability to enforce monopolies against smuggling and rivals.

Over time, other families – like the Pazzi in Florence – also tried to insert themselves into papal alum and finance, sometimes as rivals to the Medici. The more the Medici bank’s profits and political role depended on this narrow set of arrangements, the more path dependent their strategy became [MODEL: Path dependence].

What began as a smart move locked them into a structure that would be hard to unwind if conditions changed.

Act IV – Cracks in the machine: governance and princes

From the outside, the Medici Bank still looked solid: big clients, wide network, well-known name. Inside, the control system was starting to fail.

Branch managers vs Florence: the principal–agent problem in practice

The hub-and-spoke partnership model worked well when:

• The number of branches was small.
• The owners were deeply involved.
• The environment was relatively stable.

As the bank expanded:

• Branches in Lyon, London, Bruges, and elsewhere operated far from Florence.
• Local politics and business pressures differed sharply.
• Communication was slow – letters could take weeks or months.
• Books were complex enough that only insiders or skilled auditors could really see the risk.

Branch managers had strong incentives to:

• Grow business volumes.
• Please powerful local clients (kings, dukes, major merchants).
• Show profits in the short run to keep their position and profit share.

Florence had formal power and annual audits. But information asymmetry was real: the agent always knew more than the principal.

Some of the Medici’s partnership contracts show their anxiety:

• Managers were forbidden from leaving their city except for specific trade fairs or necessary trips.
• They faced strict caps on private side-business.
• Rules limited gifts, hospitality, and certain kinds of credit.

These are all attempts to claw back control in an environment where the agent has more real-time information and can hide risk.

In some branches, things still went badly:

• In London, political pressure and competition pushed the branch into lending to King Edward IV of England and his circle. The English crown, caught up in the Wars of the Roses, was not a safe counterparty.
• In Bruges, under manager Tommaso Portinari, the branch extended large, poorly secured loans to the Burgundian court. When that court ran into trouble, those loans turned into massive losses.

These are exactly the kinds of sovereign exposures Giovanni had tried to avoid. But now they were happening, bit by bit, at the branch level, driven by local incentives.

Once you have a branch whose survival depends on pleasing a ruler who can change the rules, you create moral hazard [MODEL: Moral hazard]:

• The ruler knows you can’t easily walk away.
• He is more likely to delay payment, demand more credit, or pressure you for favorable terms.
• The bank, fearing loss of access or political retaliation, goes along.

Owners get distracted and the budget gets soft

At the same time, the owners’ discipline was weakening.

Cosimo increasingly focused on politics and culture. After him came:

• Piero “the Gouty” – physically ill, less forceful, reliant on advisers.
• Lorenzo “the Magnificent” – brilliant, charismatic, and deeply engaged in politics and art, but less interested in boring balance-sheet details.

The Medici family’s spending rose:

• War costs.
• Patronage of artists and scholars.
• Luxury consumption.

Instead of treating the bank as a fragile balance sheet that had to stay strong, the family often treated it as a bottomless wallet.

This is what economists call a soft budget constraint [MODEL: Soft budget constraints]:

• A normal firm with a hard budget constraint dies if it runs out of cash and capital.
• A firm tied to a powerful sponsor often assumes that someone will bail it out.
• That expectation makes everyone more relaxed about losses.

Inside the Medici system, branches and managers could believe, consciously or not, that:

• Florence would cover losses rather than let a prestigious branch fail.
• Papal favor or family power could patch shortfalls.

For a while, that was true. But each bailout ate away at equity.

From a systems point of view [MODEL: Systems thinking], the Medici organization now had:

• Reinforcing loops that boosted scale, prestige, and political entanglement.
• Weak and slow balancing loops (audits, partner exits, capital discipline).
• Growing delays between risky decisions (e.g., bad loans to princes) and visible consequences (defaults, branch failures).

The system could drift quite far from safety before hitting a visible wall.

Act V – Lorenzo the Magnificent and the slow-motion crash

By the time Lorenzo de’ Medici took over in 1469, the Medici Bank was still probably the biggest in Europe, but it was more fragile than it looked.

Lorenzo’s priorities and the weakening balance sheet

Lorenzo saw the bank as one tool among many:

• He used it to fund Florentine diplomacy and war.
• He used it to maintain coalitions in Italy.
• He used its profits – and sometimes its capital – to support an extraordinary artistic and cultural program in Florence.

He was very good at politics in the short term. He kept Florence influential in Italy and resisted enemies for decades. But this focus meant:

• He spent less time enforcing strict financial discipline.
• He was willing to tap the bank to cover political needs.

Meanwhile, the real economy was shifting:

• Parts of the wool industry in Florence were under pressure from competition in other regions.
• The alum business faced competition and smuggling.
• Some royal and noble clients delayed or defaulted on debts.
• Rival families also sought papal favor and alum rights.

If you look at the Medici Bank through a simple bank balance sheet lens [MODEL: Bank balance sheet basics]:

• Assets: loans to merchants and rulers, equity in alum ventures, claims on branches, some real assets.
• Liabilities: deposits (including papal funds), partner capital commitments, debts to other merchants and banks.
• Equity: what’s left for the Medici and their partners if assets exceed liabilities.

As branches like Bruges and London took losses, assets shrank. If, instead of recapitalizing the bank (adding more equity), the family pulled money out for politics and lifestyle, the equity cushion got thinner.

A bank with thin equity can look normal – until a shock hits.

1494: when politics triggers insolvency

By the early 1490s:

• The bank had suffered serious branch-level losses.
• Papal and alum profits were not as dominant or secure as before.
• The Medici family’s domestic legitimacy in Florence was eroding.
• Savonarola’s sermons were sharpening popular anger against luxury and corruption.

Then Charles VIII of France marched into Italy in 1494.

Florence’s rulers mishandled the crisis:

• They failed to present a clear, unified stance.
• They tried to navigate between French demands and Italian alliances and satisfied nobody.
• Public anger focused on them as self-interested oligarchs.

The result:

• The Medici were expelled from Florence.
• Their property in the city was attacked.
• The main Florentine bank office was sacked, and records destroyed.
• Some branches abroad were seized by rivals or went independent.

On paper, the bank is considered liquidated in 1494. Some pieces limped on in other hands, but the Medici Bank as a coherent network was finished.

It’s tempting to blame “politics” or “the mob”. But if the underlying bank had been highly capitalized, less entangled with rulers, and more tightly governed, it might have survived a regime change. Plenty of banks outlive governments.

Instead, the Medici Bank hit 1494 with:

• Weak capital.
• Bad sovereign loans.
• Over-reliance on papal and alum deals.
• Owners who had used it as a political tool.

The French invasion and Florentine revolt were the spark. The balance sheet was already soaked in fuel.

What really caused the outcome

If you strip the Renaissance decoration away, the Medici Bank’s trajectory looks very familiar.

Why it rose

1. Disciplined early risk choices. Giovanni avoided the trap that killed earlier banks: huge, unsecured loans to kings. He focused on merchants and the papacy. This gave the bank a good risk-adjusted return profile and kept it alive long enough to grow.

2. Strong early governance and accounting. The hub-and-spoke partnership model with local capital at risk, annual dissolution of partnerships, and serious double-entry bookkeeping were real innovations. They reduced some of the principal–agent problems and made long-distance banking workable.

3. Strategic geographic positioning. Medici branches were placed at key trade and power nodes: Rome, Venice, Bruges, London, Lyon. That created network effects: the more they covered, the more useful they became, and the better their information.

4. Synergy with politics and industry. Combining banking with textiles and alum, and tying it to papal finance, created economies of scope and political clout. The reinforcing loop of “profits → political influence → business opportunities → profits” pushed them to the top.

Why it fell

1. Governance didn’t scale with size and complexity. As the network grew, distance, complexity, and information asymmetry increased. Annual audits and formal rules could not fully control branch managers facing intense local pressures. Risky loans to rulers crept in through the back door.

2. They drifted into the risks they once avoided. Giovanni’s “no loans to princes” rule eroded. By Lorenzo’s time, the bank was heavily exposed to exactly those sovereigns, often as the price of doing business in key markets.

3. Concentration in papal and alum business created fragility. Heavy dependence on papal deposits and alum monopolies concentrated risk in a narrow political and commodity channel. What had been a strength became a potential single point of failure.

4. The family treated the bank like a wallet, not a system. Rising political and lifestyle spending drained capital. Rather than recapitalize after losses, they continued to pull resources out. That turned what could have been survivable shocks into existential ones.

5. A political shock hit a financially weak structure. The French invasion and Medici expulsion in 1494 were dramatic, but they were not the underlying cause. They exposed weaknesses built up over decades.

The pattern is very modern: early discipline, successful scaling, gradual erosion of controls, political entanglement, then a crisis revealing the true state of the balance sheet.

Mental models & lessons

Let’s pull out a few models that this story makes concrete.

1. Principal–agent problem

What it is. When owners or funders (principals) rely on others (agents) to make decisions with their money, and the agents have different incentives and better information, misalignment appears.

In this case. The Medici in Florence and their investors provided the capital. Branch managers in London, Bruges, Lyon, and elsewhere had day-to-day control. They faced local political pressure, had more up-to-date information, and were rewarded for growth and short-term profits. That’s how a bank founded on “no loans to kings” ended up deeply exposed to kings anyway: not through one big policy decision, but through many local choices over time.

2. Reinforcing feedback loops

What it is. A reinforcing loop is a process where an effect feeds back into its own cause: success breeds more success, which breeds more success. It’s how small advantages turn into dominance – and sometimes into overreach.

In this case. Early prudent banking gave the Medici profits and reputation. That led to papal contracts and lucrative alum ventures, which made them richer and more politically powerful. Political power, in turn, brought more clients and protections. The same loop also fueled their overextension: more power made it easier to take bigger, riskier bets and to believe they could always be bailed out or protected.

3. Path dependence

What it is. Early decisions can lock you into a path that becomes hard to change, even if conditions change, because infrastructure, relationships, and expectations accumulate around those decisions.

In this case. Giovanni’s early pivot into papal banking and Cosimo’s embrace of alum and textiles built a business model centered on being “God’s bankers” and key alum providers. Over decades, contracts, relationships, and capabilities were all optimized for that role. When papal politics shifted or alum markets changed, the Medici couldn’t easily pivot to a different model. Their strengths had become structural commitments.

4. Bank balance sheet basics

What it is. A bank is a leveraged balance sheet. Its assets need to be reasonably safe and diversified. Its liabilities (especially deposits) need to be honored on demand. Its equity is the thin layer absorbing losses. If that equity is too small for the risks taken, even a modest shock can wipe it out.

In this case. The Medici Bank’s assets included risky sovereign loans and concentrated bets on alum and papal business. Its liabilities included deposits from wealthy clients and the Church. The Medici family kept pulling out wealth for politics and consumption instead of fortifying equity. So when events like royal defaults, branch-level failures, and political upheaval hit, there wasn’t enough buffer. The bank’s name and history couldn’t save a weak balance sheet.

5. Moral hazard

What it is. If someone is partly insulated from the downside of their actions, they are more likely to take risk. The expectation of a bailout or protection changes behavior.

In this case. Branch managers and rulers both operated under a kind of moral hazard. Managers could hope that Florence or papal patrons would not allow a prestigious branch to fail. Rulers, knowing banks were desperate to maintain access and favor, could drag out repayments and ask for more. Over time, this made the whole system more fragile.

This article was produced with AI assistance and human editing.