After the economic upheavals following the Black Death, the dissolution of the feudal system was set in motion, and Europe was on course toward the emergence of the modern nation state. Feudal strictures were gradually reduced, many peasants were freed from the obligation to pay feudal dues, and many towns were granted the right of self-governance. The growth of commerce led to the emergence of a middle class, or "Bourgeoisie" (a word originating from the French "bourg" for a medieval town or village, sharing the same roots as the German "burg"). Unlike the peasants of the earlier feudal system, the middle class had enforceable legal rights to their capital which they could defend in courts, and they had much greater opportunity for upward mobility.
Royalty had traditionally been dependent on the nobility, but while the clergy and nobility had been exempt from taxation, the growing middle class was not. Royalty consequently began to court the favor of prosperous members of the middle class. Middle class representatives were appointed to positions in councils, assemblies and parliaments, where they were granted new rights and privileges in exchange for their agreement to finance the royals through taxation. This process ultimately led to the emergence of the nation-state.
The growth of trade and the re-emergence of banking in Europe had already begun during the Crusades, during which time Italian city-states such as Venice, Genoa and Pisa had prospered by supplying ships, and by receiving rich cargo of spices, silk, jewels, perfumes and other valuable goods from the East. The Italian city-states were not the only ones to prosper from the expansion of trade. Many German, English, and French cities also grew and thrived. In the late 13th century Germans founded the Hanseatic League, an alliance of trading cities and merchant guilds who provided protection for its members. The Hanseatic cities had their own legal systems, and the league sent its own foreign service agents to make deals with trading partners.
Trade routes connected cities throughout Europe, and accelerated the growth of banking and commerce. Traders and financiers began using letters of credit and foreign exchange documents, converting currencies, storing and transporting the money. When possible they also engaged in money lending. The Vatican's prohibition of lending money and charging interest ("usury") complicated matters, but it had been ignored in the Knight's Templars favor, and the proto-bankers of medieval Europe often managed to find exceptions as well. For example, profiting from time differences in foreign exchange contracts tended to fall outside the official definition of usury, and consequently became a popular practice.
The first medieval merchant banks were originally started by Italian grain merchants, notably the Lombard bankers. Jews that had been expelled from Spain also began to enter Italy and the trade, where they had an advantage over the native Italians who were forbidden by the Christian anti-usury laws from lending money at interest. Merchant bankers began settling trades as middlemen, and holding deposits against notes of exchange. The funds being held were often used by the merchant bankers for their own trades, which meant that they would often have had insufficient funds if their depositors had simultaneously demanded to withdraw their money. The words "bank" and "bankrupt" illustrate these origins: Bank is derived from "banca," Italian for bench (i.e., the counters over which the merchant bankers made trades), and the term bankrupt is derived from "banca rotta," meaning "broken bench."
By the middle of the 13th century the Italian merchant bankers devised clever legal maneuvers to avoid the ban on usury. For example, making loans with no interest, but requiring that the loan be insured against loss or delay in repayment. Merchant bankers such as the Cahorsins and Lombards became prosperous using such techniques. The activities of the increasingly powerful Italian merchant bankers aroused a great deal of opposition. King Martin I of Aragon had them expelled in 1401, and Henry IV declared a nationwide ban on their profiteering. The Italian bankers were also expelled from Flanders and Paris later in the same decade. Nonetheless, their power and influence continued to grow.
In 1403 the bankers won a ruling that made money-lending at interest legal in Florence. A number of powerful Genoese families founded the Bank of Saint George in 1407, and the Bank remained a powerful force for four centuries. The Bank governed many of Genoa's overseas territories and lent large sums of money to powerful European rulers.
Florence was the source of many of the most famous and powerful banking families, notably the Medicis, who had founded the legendary Medici Bank in 1397. Giovanni di Bicci de'Medici, the founder of the Medici Bank, anticipated and supported the return of the Pope to Rome, and in 1413 the papacy rewarded de'Medici by appointing him the Pope's banker. Interest on the Pope's huge debts — as well as favorable contracts and mining rights — made the Medici Bank one of the wealthiest multi-national businesses in Europe. The Italian bankers became known as God's Bankers, or the Pope's Usurers.
This history of money will continue in Part VII, featuring the Great Bullion Famine, the rise of the Fugger banking dynasty, and the beginning of the Age of Exploration...