At the start of the 15th century the Medici are Europe's greatest banking dynasty, but their political power later distracts them from the highly focussed business of making money. After the reign of Lorenzo the Magnificent the bank's finances are in a perilous state.
The Medici later triumph as dukes of Florence. But their role as leading bankers is usurped by a German dynasty, that of the Fuggers. Like the Medici, the Fuggers amass vast wealth by massaging the finances of the papacy and of great princes.
The shift of European power to the Habsburgs in the late 15th century is the basis of the Fugger wealth. The family descends from an Augsburg weaver and their first fortune is in textiles. They make their first loan to a Habsburg archduke in 1487, taking as security an interest in silver and copper mines in the Tirol - the beginning of an extensive family involvement in mining and precious metals. In 1491 a loan is made to Maximilian; a subsequent loan to him in 1505 (by which time Maximilian is the Holy Roman emperor) is secured by the feudal rights to two Austrian counties.
But by far the largest Fugger project is undertaken in 1519 on behalf of Maximilian's grandson, Charles.
Charles is determined to succeed his grandfather as German king and Holy Roman emperor, but the post involves election and there is a rival candidate - the French king, Francis I. Charles turns to the Fugger family for his election expenses. Out of a massive total of 852,000 florins, to be spent on bribing the seven electors, the Fuggers provide nearly two thirds (544,000 florins). The campaign succeeds. The candidate is elected as Charles V.
Interest rates at the time are never less than 12% per annum. And when a loan has to be raised urgently, the 16th-century banker is often able to negotiate a rate of as high as 45%. Banking for emperors is profitable.
Continuous warfare and other expenses of state are a constant drain on Charles's treasury. Like any ruler of the time, his costs outrun his sources of revenue. Loans from bankers fill the gap, and they are often repaid by leases on sources of royal income.
Thus the Fuggers are granted in 1525 the revenues from the Spanish orders of knighthood, together with the profits from mercury and silver mines. The bankers therefore become, in a sense, both revenue collectors and managers of state assets. But their high rates of interest can quickly cripple a kingdom engaged in too many unprofitable wars.
The Fuggers use their wealth responsibly, as can still be seen in the Fuggerei - a community for the poor, built in Augsburg in 1519 (the year of the imperial election) and still in use today. By the end of the 16th century the family withdraws from financial risk-taking, after some disastrous ventures, and settles into the more conventional aristocratic existence which their wealth has bought.
There will be other such exceptional dynasties, most notably the Rothschilds. But by the early 17th century banking begins also to exist in its modern sense - as a commercial service for customers rather than kings.
In 1587 the Banco della Piazza di Rialto is opened in Venice as a state initiative. Its purpose it to carry out the important function of holding merchants' funds on safe deposit, and enabling financial transactions in Venice and elsewhere to be made without the physical transfer of coins.
This was an accepted part of trade in ancient Greece, but it has previously been carried out by individual moneylenders - involving a high risk of bankruptcy. The Venetian initiative, with the expenses born by the state, is an attempt to provide a measure of security in this central aspect of the risky business of trade.
Other Mediterranean trading centres (in particular Barcelona and Genoa) have possibly taken this step before Venice, and it is soon followed in northern cities - Amsterdam in 1609, Hamburg in 1619, Nuremberg in 1621.
A related development is that of the cheque, a device which depends on the existence of banks as recognized institutions. A bill of exchange, the original method of transferring money without the use of coins, is a complex contract between private parties and one or more moneylenders. A cheque is a bill of exchange between banks, payable by one of the banks to whoever holds and presents the cheque.
This much simplified version of a bill of exchange slowly gains acceptance from the late 17th century. At the same time it is realized that the banking process has its own in-built potential for profit which can more than cover the costs of processing cheques and transferring money.
The total of the money left on deposit by a bank's customers is a large sum, only a fraction of which is usually required for withdrawals. A proportion of the rest can be lent out at interest, bringing profit to the bank. When the customers later come to realize this hidden value of their unused funds, the bank's profit becomes the difference between the rates of interest paid to depositors and demanded from debtors.
The transformation from moneylenders into private banks is a gradual one during the 17th and 18th centuries. In England it is achieved by various families of goldsmiths who early in the period accept money on deposit purely for safe-keeping. Then they begin to lend some of it out. Finally, by the 18th century, they make banking their business in place of their original craft as goldsmiths.
With private banking part of the fabric of commercial life, the next stage in the story is the development of national banks.
Venice, after being possibly the first city to found a bank for the keeping of money on safe deposit and the clearing of cheques, is also a pioneer in the involvement of a bank with state finances. In 1617 the Banco Giro is established to solve problems encountered by the earlier Banco della Piazza di Rialto, which has got into trouble through the making of unsecured loans.
Its debtors include the Venetian government. The Banco Giro is founded on the principle that the government's creditors accept payment in the form of credit with the new bank. In solving an existing problem, this also provides new opportunities. Venice now has a mechanism for raising public finance on the basis of guaranteed credit.
The logical extension of this concept is a national bank, established in some form of partnership with the state. The earliest example is the Bank of Sweden, founded in 1668 and today the world's oldest surviving bank. It is followed before the end of the century by the Bank of England, originally a joint-stock company which begins its existence in 1694 by arranging a loan of £1,200,000 to the government.
During the 18th century the Bank of England gradually undertakes many of the tasks now associated with a central bank. It organizes the sale of government bonds when funds need to be raised. It acts as a clearing bank for government departments, facilitating and processing their daily transactions.
The Bank of England also becomes the banker to other London banks, and through them to a much wider banking community. The London banks act as agents in the capital for the many small private banks which open around the country in the second half of the 18th century.
All these banks use the Bank of England as a source of credit in a crisis. For this purpose the national bank needs a large reserve of gold, which it accumulates until almost the entire hoard of the nation's bullion is stored in its vaults.
William IX, ruler of the German state of Hesse-Kappel and possessor of a vast fortune, has for some years consulted in a private capacity his friend Mayer Amschel Rothschild, a Jewish banker and merchant of Frankfurt. He values Rothschild's advice both on matters of finance and on additions to his art collection. In 1801 he formally appoints him his court agent, and encourages him to offer his financial skills to other European princes in these troubled years when Napoleon is unsettling the continent.
Rothschild responds energetically to this opportunity. By 1803 he is in a position to lend 20 million francs to the Danish government.
The Danish loan is the first of many such transactions on behalf of governments which rapidly establish the Rothschild family as Europe's most powerful bankers, rising to a pre-eminence comparable to that of the Medici and the Fugger in earlier centuries.
The family is soon represented in all the important centres of the continent. Mayer Amschel has five sons. He keeps the eldest, Anselm Mayer, at his side to inherit the Frankfurt bank. The four younger sons establish branches elsewhere: Solomon in Vienna, Nathan Mayer in London, Karl in Naples and Jacob in Paris.
The Rothschild family gambles heavily on the eventual defeat of Napoleon. Their loans are all to his enemies (surprisingly Napoleon allows Jacob, operating from Paris, to raise money for the exiled Bourbons). Their network of contacts enables them to move money around Europe even in wartime conditions. A famous example, but only one of many, is Nathan's transfer of large sums of money from London to Portugal to pay the British troops in the Peninsular War.
By the end of the war the Rothschild family has a vast reputation among the allies, and a close involvement in the government finances of many nations.
The qualities soundly underpinning their good fortune, in addition to undoubted financial flair, are that they are trustworthy and very well informed.
An example of the former is the fortune left in Mayer Amschel Rothschild's care when his patron flees from Hesse-Kassel after Napoleon's victory at Jena in 1806. It amounts to perhaps half a million pounds in the money of those days. In spite of every attempt by Napoleon's agents to make him make him hand it over, Rothschild keeps it safe and returns it, with interest, to its owner in 1815.
As to reliable information, the most famous incident concerns that same year, 1815. On June 20 Nathan Mayer Rothschild calls on the government in London, during the morning, with a startling piece of good news. The duke of Wellington, he informs the officials - who are at first somewhat incredulous - has two days earlier won a decisive victory over Napoleon at Waterloo.
Confirmation arrives that afternoon through the government's own channels. The Rothschild network of communication includes, famously, the use of homing pigeons. But on this occasion their success is due to one of their couriers, who was waiting in the harbour at Ostend for the first scrap of news.