The Crash of the European Financial System in 1345
The Bardi were a Florentine banking family. By 1310 they were the wealthiest family in Florence. They and the other two leading family banks, the Peruzzi and
the Acciaiuoli, maintained branches at locations stretching from
England and the Netherlands to North Africa and the Middle East. The
company’s basic operating capital belonged to the family and a few close
partners, but money was also received on deposit from outsiders. The
foreign branches were operated by salaried employees or by individual
partners sent abroad. The firm traded in agricultural commodities and
industrial products, especially woollen textiles, for which Florence was
a major center of production, but they drew much of their profit from
fees levied on exchange of currency. These fees also served as a legal
screen behind which they concealed the practice of usury (charging
interest on loans), a practice outlawed by canon law. Conducting
large-scale commercial and credit business over great distances was
risky. The Florentine banks flourished because they had better and more
current economic information than those they did business with.
Extension
of credit was the most risky activity of all, and in the 1340s the
Bardi and other leading banks discovered this to their sorrow. Both
firms made the mistake of lending vast sums to King Edward III of
England during the 1330s as he prepared for the conflict with France
that became the Hundred Years’ War. The bankers
soon realized that they had extended too much credit, but since they had
already lent so much, they felt compelled to lend more, lest they lose
what they had already lent. They also continued lending because they
needed royal licenses for the export of medieval England’s great
international product, wool, and lending to the king was the price they
had to pay for permission to export. By 1343, when it became obvious
that Edward was not going to score a speedy victory, the king repudiated
his debts to the unpopular foreign bankers.
The amounts lost were enormous: 900,000
gold florins owed to the Bardi and 600,000 to the Peruzzi, none of it
ever repaid. Both firms, and also several other Italian banks, were
ruined; and since they also held money on deposit from wealthy
individuals throughout Italy, their collapse spread financial loss far
beyond their membership. The Peruzzi bank went into bankruptcy in 1343;
the Bardi struggled on for three more years but were also liquidated.
Smaller firms survived the crash and by the end of the century rose to
great wealth and power. The new masters of Florentine banking were the Pazzi,Rucellai, Strozzi, and Medici,
though these firms never had the vast capital assets of the banks that
perished in the 1340s. Some economic historians have concluded that this
collapse of the early Florentine banks was a major cause of a great depression that lasted beyond the 1340s.
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