{"id":19921,"date":"2023-04-16T17:34:54","date_gmt":"2023-04-16T17:34:54","guid":{"rendered":"https:\/\/crowdfundjunction.com\/blog\/lessons-on-fractional-reserve-banking-from-15th-century-italy-featured-bitcoin-news\/"},"modified":"2023-04-16T17:34:54","modified_gmt":"2023-04-16T17:34:54","slug":"lessons-on-fractional-reserve-banking-from-15th-century-italy-featured-bitcoin-news","status":"publish","type":"post","link":"https:\/\/crowdfundjunction.com\/blog\/lessons-on-fractional-reserve-banking-from-15th-century-italy-featured-bitcoin-news\/","title":{"rendered":"Lessons on Fractional Reserve Banking From 15th Century Italy \u2013 Featured Bitcoin News"},"content":{"rendered":"

(Originally posted on : Bitcoin News )<\/b>
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Amid the banking chaos of the 21st century, some are looking back more than 600 years ago, to the Medici Bank \u2014 one of the most powerful banks of its time. It established its business and became one of the most respected banks in Europe during its prime, and the prominent Italian family of bankers were early adopters of fractional reserve banking, a practice that Medici Bank customers were unaware of, and that ultimately led to the financial institution\u2019s failure.<\/strong><\/p>\n

\u2018Nothing New\u2019\u2014 How the Medici Bank Failure Is Still Very Relevant to Today\u2019s Modern Banking Practices<\/h2>\n

The collapse of three major banks in mid-March 2023 has caused people to scrutinize the risks<\/a> of fractional reserve banking. The practice of fractional reserve banking is essentially when a financial institution holds only a fraction of deposits in the bank, and the remaining funds are used to lend or invest in order to obtain a yield. One of the earliest known examples<\/a> of fractional reserve banking was the Medici Bank, founded in Florence, Italy, in 1397 by Giovanni di Bicci de\u2019 Medici.<\/p>\n

In the first five years of operation, the Medici Bank grew rapidly, and before the financial institution\u2019s demise, it established branches all over Western Europe. Similar to bankers in the early 20th century<\/a> like J.P. Morgan, Jacob Schiff, Paul Warburg, and George F. Baker, members of the House of Medici were extremely powerful. The Medici Bank was known to be one of the largest business enterprises during the Renaissance but ultimately failed after close to 100 years of operation.<\/p>\n

Philip J. Weights, the president of the Swiss Finance and Technology Association (SFTA), explained in a 2015 Linkedin post<\/a> how the weight of \u201cexcessive lending\u201d and \u201cinsufficient reserves\u201d led to the bank\u2019s ultimate demise. According to Raymond De Roover\u2019s book \u201cThe Rise and Decline of the Medici Bank (1397-1494),\u201d published in 1963, liquidity was an issue from the bank\u2019s inception. De Roover\u2019s book details that the Medicis\u2019 reserves held less than 10% of deposits due to the family members\u2019 managerial abilities.<\/p>\n

The 380-page book<\/a> explains how the Medici Bank experienced a period of decline between 1463 and 1490 due to shady and corrupt banking practices. The fraudulent schemes caused several Medici branches to be liquidated and sold off to other banks. De Roover argued that despite being a prominent member of the House of Medici and a successful banker, Francesco Sassetti \u201cwas unable to avoid the disastrous liquidation of the Bruges, London, and Milan branches.\u201d De Roover\u2019s book notes that significant lending was a popular practice that gathered high-interest rates.<\/p>\n

\"The
A Medici Bank ledger or double-entry bookkeeping system shows a list of debtors and creditors. Photo credit: The Penn Libraries\u2019 Colenda Digital Repository.<\/a><\/figcaption><\/figure>\n

Florins, gold coins minted by the Republic of Florence, were often held on the Medici Bank balance sheet. However, the lack of reserves was a constant source of frustration for both Medici banking partners, and government officials and customers. In a 2018 editorial<\/a> on bigthink.com, author Mike Colagrossi detailed that \u201cit was due to advancements and financial solutions like these that the Medici bank became so powerful\u201d as the Medicis received high interest on loaned payments. Colagrossi notes that the downfall of the bank took place after the death of Cosimo Medici in 1464<\/span>, who was the bank\u2019s boss at the time.<\/p>\n

After the fall of three major banks in 2023, Jim Bianco<\/a>, president of Bianco Research, a firm that specializes in macro analysis for institutional investors, explained how fractional reserve banking \u201cwas invented by the Medicis in Florence in the late 15th century.\u201d In his Twitter post<\/a>, Bianco also mentions the \u201ctuppence\u201d scene<\/a> in the 1960s Disney musical film \u201cMary Poppins\u201d and the bank run scene from \u201cIt\u2019s a Wonderful Life\u201d filmed in the 1930s, stating that \u201call of these are still very relevant depictions of what is happening today.\u201d<\/p>\n

Bianco opined:<\/p>\n

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Nothing that is happening is new. Our banking system is several hundred years old and has constantly had these issues.<\/p>\n<\/blockquote>\n

Triple-Entry Bookkeeping \u2014 A New System of Accounting<\/h2>\n

Bianco also mentioned that double-entry bookkeeping<\/a> was the \u201ctechnology\u201d used to enable the Medici Bank\u2019s fractional reserve banking practices. The double-entry scheme involves a ledger that records both debits and credits and is still used in the modern financial world today. At the time, the Franciscan Friar Luca Pacioli wrote a book about double-entry accounting with help<\/a> from the well-known Renaissance artist Leonardo da Vinci. Although Pacioli and da Vinci did not claim to invent the new system, their research led to the wider and more structured use of double-entry bookkeeping that\u2019s still used today.<\/p>\n

\"The
While Luca Pacioli\u2019s system was a disruptive force in the financial world allowing the Medici Bank to fractionalize reserves with ease, Satoshi Nakamoto\u2019s triple-entry bookkeeping system<\/a>, introduced with Bitcoin, has also disrupted today\u2019s financial system.<\/figcaption><\/figure>\n

Soon after the method was popularized, Giovanni de Medici implemented the concept into his family\u2019s bank. It allowed the House of Medici to operate with less than 10% of deposits and extend its lending practices far and wide until liquidity completely dried up. More than 600 years later, an anonymous person or group released a paper<\/a> that introduced the concept of triple-entry bookkeeping<\/a>. In addition to records of both debits and credits, a third component was added, which is a cryptographic receipt verified by a third party to validate the ledger\u2019s entries.<\/p>\n

Satoshi Nakamoto\u2019s invention has produced a system where a double-entry bookkeeping system doesn\u2019t need to be trusted now that an improved ledger accounting scheme exists. A single-entry or double-entry accounting system can be forged and manipulated, but the cryptographic assurance from a triple-entry bookkeeping system is much harder to add fraudulent data to. While Bianco is correct that there is nothing new with the way bankers operate today, compared to the days of Medici, Nakamoto\u2019s invention has given the world a new method of accounting that can transform it a great deal, just as the invention of double-entry bookkeeping has done.<\/p>\n

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\nTags in this story
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advancements<\/a>, bank run scene<\/a>, Banking Crisis<\/a>, Bankruptcy<\/a>, Bianco Research<\/a>, bigthink.com<\/a>, Bitcoin<\/a>, Bitcoin (BTC)<\/a>, Corruption<\/a>, Cosimo Medici<\/a>, Customers<\/a>, Financial Institutions<\/a>, financial solutions<\/a>, Fractional-reserve banking<\/a>, Francesco Sassetti<\/a>, fraudulent schemes<\/a>, Giovanni de Medici<\/a>, gold coins<\/a>, government officials<\/a>, House of Medici<\/a>, institutional investors<\/a>, interest rates<\/a>, It’s a Wonderful Life<\/a>, J.P. Morgan<\/a>, Jim Bianco<\/a>, lending<\/a>, Leonardo da Vinci<\/a>, Liquidity<\/a>, Luca Pacioli<\/a>, macro analysis<\/a>, Mary Poppins<\/a>, Medici Bank<\/a>, Mike Colagrossi<\/a>, Paul Warburg<\/a>, Philip J. Weights<\/a>, power<\/a>, Raymond De Roover<\/a>, Renaissance<\/a>, Republic of Florence<\/a>, reserves<\/a>, Satoshi<\/a>, Satoshi Nakamoto<\/a>, tuppence scene<\/a>, Western Europe<\/a><\/div>\n<\/div>\n

What lessons can be learned from the fall of the Medici Bank? Share your thoughts in the comments section below.<\/strong><\/em><\/p>\n

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\nJamie Redman <\/h6>\n

\nJamie Redman is the News Lead at Bitcoin.com News and a financial tech journalist living in Florida. Redman has been an active member of the cryptocurrency community since 2011. He has a passion for Bitcoin, open-source code, and decentralized applications. Since September 2015, Redman has written more than 6,000 articles for Bitcoin.com News about the disruptive protocols emerging today.

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Image Credits<\/b>: Shutterstock, Pixabay, Wiki Commons<\/em><\/p>\n

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Disclaimer<\/strong>: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com<\/a> does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.<\/p>\n<\/div>\n

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