Medieval Florence

Medieval Florence was an economic great power. In the 15th century, it had 270 wool-processing workshops, 83 silk manufactories, and 33 banks. After the economic crisis of the 14th century, the declining wool industry was replaced by silk production. By 1537, the number of wool workshops in Florence decreased from 270 to 63, while the number of craftsmen working with silk doubled.

Significant changes also took place in trade. Merchants obtained raw materials from distant regions, transported them to Italy, where local craftsmen produced finished goods, which the merchants then purchased, transported, and sold. This method led to the emergence of banking, which facilitated the movement of capital and solved the problem of currency exchange. By this time, merchants were already educated individuals, knowledgeable in accounting and law. They spent their apprenticeship years in trading offices, where they gained practical experience and learned foreign languages (French being the most important). They were familiar with the quality and prices of goods, as well as the techniques of selling. They learned how to reduce risks and could decide whether to conduct their activities individually or in partnerships. They were persuasive, skilled at building connections, and obtained their information from well-developed networks, giving them a broader outlook than their contemporaries. With the expansion of trade, a new form of organization characteristic of modern capitalism emerged: merchants or trading companies controlled not only trade but also production. In addition, they increasingly handled financial transactions as well.

The businessmen of the time provided enormous loans to popes, rulers, and princes in exchange for trade privileges and monopolies. The Bardi and Peruzzi banking houses supported King Edward III of England and Robert of Anjou with large sums, but the failure to repay these loans led to their bankruptcy. Learning from this, the Medici bank avoided such risky transactions for a long time. European trade was dominated by Italians thanks to their initiative, adventurous spirit, and more advanced commercial tools (such as bills of exchange and double-entry bookkeeping). This leading role was shared by Venice, Genoa, and Florence. Florence became the most important financial center in Europe.

In the 15th century, individual merchants were replaced by trading companies (commenda in Genoa, colleganza in Venice), reducing the risks associated with enterprise. These partnerships were usually formed for the duration of a single venture, in which a silent partner provided the capital necessary for the journey. In case of loss, the investor bore the loss, but in case of profit, they received three-quarters of the gain in addition to their original investment. A merchant could contract with multiple investors for a single venture, who shared both the profits and the risks. Relationships initially formed for a single journey often continued for multiple ventures, leading to the establishment of the House of San Giorgio in Genoa, which became one of the most important financial institutions in the West and lasted for nearly four centuries. Even the state had no authority over it; its operations and administration were clearly separated from the state.

In Florence, state officials were merely puppets under the economic power of the Medici family. In the 14th century, the gigantic companies of the Bardi, Peruzzi, and Acciaiuoli families were established. Their network was highly centralized: the Florentine director managed the company, while branch offices were led by agents, who were often business partners. They had little room for initiative and were under strict supervision. They were occasionally transferred to prevent them from forming overly close ties with local leaders. The disadvantage of centralization was that the failure of a single branch could bring down the entire network. Recognizing this, the Medici developed a more flexible system and avoided catastrophic collapses. Their innovation was that branch managers contributed to the capital and also shared in the profits, which motivated them to pursue successful business deals. Branches were autonomous, operating under loose supervision from the central office—thus forming a decentralized system.

Most income came from their Florentine and Venetian banks, and the Roman branch was also extremely profitable. They managed a large portion of the revenues flowing into the Papacy from across the Christian world, and Roman clergy also entrusted them with managing their wealth. With large amounts of cash at their disposal, they conducted highly profitable financial operations. Annual profits could reach up to 30% of the invested capital. This profit was not reinvested in the business but used to purchase real estate in and around Florence, significantly increasing the family's wealth.

The Medici bank reached its peak under Cosimo de' Medici, who tripled the number of branches, opening new ones in Bruges, London, Avignon, and Milan. After his death, the business began to decline, as his successors proved incompetent. Ottoman expansion and the financial crisis of 1464–65 also affected Florence. Branches sought greater independence, and the financial support given to the Burgundian ruler turned the French king into an enemy. This was compounded by the alum crisis.

Alum was a key product in the Italian economy. It was used for medicinal purposes and leather processing, but its most widespread use was in fixing textile dyes. It was essential for dyeing wool and silk, and the popularity of Italian textiles was largely due to their vibrant colors. The most valuable alum deposits were in Asia Minor, with smaller and lower-quality deposits in Castile. Ottoman expansion cut off access to these sources, but in 1461, high-quality alum deposits were discovered in papal territories. The Medici bank became the main shareholder of the Societas Aluminium, a company organized for the extraction, transport, and sale of alum. In 1476, Pope Sixtus IV took the alum monopoly away from the Medici and entrusted the management of the Papal revenues to their main rivals, the Pazzi family. This was a severe blow to the network, as the Roman branch was the most profitable at the time.

The Medici company rose and fell with economic cycles. It existed for 97 years (1397–1494) and became the prototype of Italian economic organizations. It was a company that simultaneously conducted financial, commercial, and industrial activities. It operated on an international scale, yet remained closely tied to its home city, Florence.