An extract from PART III WINTON EXTRACT BOOK III.indd 1 16/10/2015 12:42 WINTON EXTRACT BOOK III.indd 2 16/10/2015 12:42 PART III WINTON EXTRACT BOOK III.indd 3 16/10/2015 12:42 WINTON EXTRACT BOOK III.indd 4 16/10/2015 12:42 Florence’s Speculative Firenze 14th Century Crisis 1337–1345 In 1300, Florence’s Bardi and Peruzzi banks were undisputed champions of the lending field. They had won their spurs with their consummate mastery over commodities trading, but their vaulting ambition had encouraged them to enter into weak alliances with foreign lords and, after suffering several bruises, they were finally knocked off their steeds in the 1340s. Start of the War between Florence Edward III’s default on Hundred Years War and Pisa sovereign debt 1337 1338 1339 1340 1341 1342 1343 1344 Expulsion of Florentine Duke of Athens seizes Bankruptcy of bankers from Venice power in Florence Bardi & Peruzzi WINTON EXTRACT BOOK III.indd 5 16/10/2015 12:42 4 | THE PIT & THE PENDULUM IN SEARCH OF PASTURES NEW At the turn of the 14th century, European fi nance became increasingly reliant on the king’s willingness was dominated by Florentine merchant banking to repay his debts. At fi rst, both banks lent prudently families, the two largest of which were the Bardi and and did not overextend themselves. the Peruzzi. Their banks were immensely profi table In 1337, however, Edward III launched the Hundred institutions, operating all over Europe. In addition Years War and immediately requested big loans to lending, they engaged in international trade from the Florentine banks to fund his designs on the (primarily in grain, cloth and wool), commodities French crown. Although these loans were extremely speculation and collecting papal tithes. However, risky and repayment depended on Edward III’s their continued success depended on their ability success against the French, the Bardi and Peruzzi to break into new markets. Florence at this time advanced the money nonetheless, desirous of was experiencing rapid commercial growth, in retaining their trading privileges. The banks may also woollen textiles in particular, and her merchants have had other motives for taking on such reckless were depositing their profi ts at the Bardi and Peruzzi risks – Edward III bribed each of their agents and banks and investing in bonds underwritten by them. their agents’ wives with hundreds of thousands of This growth, however, could be sustained only if pounds in today’s money ‘in consideration of the new markets could be found for the supply of raw great help given the king’. materials and the exporting of fi nished products. This led the Bardi and Peruzzi to England – famed for its exceptional wool – and in exchange for loans to the English kings, these companies gained valuable trade concessions in a market otherwise closed to foreign merchants. Although the Bardi and Peruzzi profi ted greatly from this trade, they also ABOVE | Edward III centre | The Hundred Years War RIGHT | Medieval Venice WINTON EXTRACT BOOK III.indd 6 16/10/2015 12:42 14TH CENTURY CRISIS | 5 LOSING REALITY ON THE RIALTO Meanwhile Venice, Italy’s pre-eminent city-state, arch-rival, Pisa. Although Lucca was ultimately sold was heavily involved in currency speculation and was to a third party, war nevertheless broke out between exchanging European silver for Asian gold, resulting Florence and Pisa, resulting in a demand for war in a depreciating gold–silver price ratio across loans. So, apart from losing their primary export Europe. Although this brought wealth to Venice’s market, the Bardi and Peruzzi were now compelled rulers and merchants, it seriously disadvantaged to underwrite a ruinously expensive domestic war, Florence, whose economy was based on the gold just when Edward III was marching over Flanders fl orin. More specifi cally, it put further stress on the and asking for ever larger advances. already overextended Bardi and Peruzzi, whose trade receipts were primarily denominated in gold and ENGLISH WOOL EXPORTS AND PRICES whose expenditures were mostly in silver. In 1338, SACKS OF WOOL GRAMS OF SILVER Venice’s rulers injured Florentine interests even more PER KG 40,000 directly by expelling all the Florentine bankers and 16 merchants, repudiating their debts and blocking off 30,000 12 all the trade routes in the north and east of Italy. PRICE 20,000 OF WOOL In 1339, the noose around Florence’s neck grew 8 yet tighter. In a delightful display of medieval 10,000 4 moneygrubbing, a band of German mercenaries WOOL EXPORTS 0 seized the Italian city of Lucca, Florence’s most 0 valued market, and offered to sell it to Florence’s 1300 1320 1340 1360 1380 1400 1420 1440 Thanks to the involvement of Bardi & Peruzzi, English wool exports and prices surged in the early 14th century WINTON EXTRACT BOOK III.indd 7 16/10/2015 12:42 6 | THE PIT & THE PENDULUM Meanwhile, a vicious power struggle was occupying Florence’s two main political factions, the Ghibellines and the traditionally dominant Guelph. Shortly before the war with Pisa, the Ghibellines ousted the Guelph and sought protection from the Holy Roman Emperor. In protest, the Pope (who was allied with the Guelph) revoked the hugely lucrative licences to collect papal tithes held by the Bardis and the Peruzzis and urged a boycott against them. Accordingly, Naples expelled all its Florentine merchant bankers, depriving the system of its last major market. ROOM WITH A DEPRESSING VIEW By late 1339, the Florentine economy was in tatters and the city’s streets were crowded with the dispossessed. Banished by the rest of the world and facing rising competition from Flemish and English textiles, Florence’s banks found that merchants were withdrawing their deposits and cashing in their bonds. This was catastrophic for the Bardi and Peruzzi and only a moratorium could offer any GOLD–SILVER PRICE RATIOS IN ITALY 16 14 12 10 8 6 1250 1300 1350 1390 MILAN ASTI NAPLES ROME VENICE GENOA FLORENCE Falling gold–silver price ratios in the 1330s created diffi culties for the Bardi and Peruzzi WINTON EXTRACT BOOK III.indd 8 16/10/2015 12:42 14TH CENTURY CRISIS | 7 hope of salvation. However, the city’s new rulers England without any booty. The crowning blow came wwould not hear of any such step. Consequently, shortly afterwards, when Edward III defaulted on all tthe city’s bankers managed to arrange for a pliant his loans. Within the next two years, both the Bardi fforeign adventurer – the self-styled Duke of Athens and the Peruzzi had collapsed, sending shock waves – to seize power and rule Florence as dictator. around Europe and dragging down scores of other Predictably, his fi rst decree was a moratorium on banks with them. Credit dried up, unemployment aall private debt. This bought the bankers some leapt and depression ensued, all just in time for the sshort-term relief. Soon, however, the Duke aimed European debut of Yersinia pestis. aat complete mastery and started to default on his Florentine bankers may have succumbed to the ddebts. This angered the bankers greatly and, in temptation of speculative over-lending, but they 1343, he was deposed in a general uprising. were also concerned about their eternal salvation TThe Bardi and Peruzzi were by this time in a wretched and donated much of their gains to building sstate, but still clung to the hope that their lending to churches and commissioning devotional art. Indeed, tthe English king would pay off. Imagine their despair were it not for Bardi’s and Peruzzi’s patronage of tthen when they learnt of Edward III’s battlefi eld Giotto, many of the Renaissance’s fi nest works reverses: he had halted the war and returned to might not have been with us today. LEFT | Medieval bankers ABOVE | Battle of Cadsant, 1337 WINTON EXTRACT BOOK III.indd 9 16/10/2015 12:43 WINTON EXTRACT BOOK III.indd 10 16/10/2015 12:43 Tickling the tummies of Jackson’s wildcats panic of 1837 In the absence of a national monetary authority, american ‘pet banks’ began rolling over in ecstasy with little paws-for-thought about the consequences of overstretching themselves, and speculators began slinking around in the warm Western markets. But when President Jackson took away their cream in mid-1836, the speculators scampered away. ‘The people of this country shall yet be punished for their idolatry.’ PRESIDENT JACKSON ON THE SPECULATIVE MANIA, 1836 1830 1833 1836 1837 Indian Mexican currency Specie Circular issued Panic – most New York Removals Act debasement by President Jackson banks suspend payment 1830 1832 1834 1836 1838 1832 1834 1836 Jackson distributes Bank of England and Bank of England raises government deposits to Rothschilds prefer Spanish interest rate to 5% state banks bonds to US bonds WINTON EXTRACT BOOK III.indd 11 16/10/2015 12:43 10 | THE PIT & THE PENDULUM WHEN THE CAT’S LAPPING UP AWAY CREAMY LIQUIDITY Following the Panic of 1792, the Bank of the United This monetary expansion resulted in a surge of infl ation States (BUS) was established to act as lender of last and provided speculators with cheap credit, fuelling resort in the event of future crises, and did precisely the pre-existing boom in land, canals and railroads. this in 1819, allowing a quick and full recovery. Land had been an object of speculation since the Indian Notwithstanding, the BUS was accused by some of Removals Act of 1830 which had freed up large tracts serving the interests of Eastern commerce rather than of land in the West; but the massive expansion of cheap (Western) agriculture and labour, subjects close to credit had turned boom into bubble by 1836.