How can I establish a long term banking system for the Medieval period?

Question

Bernius Madolffo was a good and honest priest who turned to entrepreneurship after the dissolution of the Holy Roman Empire. The death of the Catholic Church and fall of Christianity in the world during the plague actually turned out to be a positive thing in Europe, as it spread chaos and allowed it to fall into warring factions each vying for control of the continent. As any rational businessman would tell you, chaos is a ladder, and the absence of a corrupt and hyprocritical church created an atmosphere of suffering for a good and honest man to profit.

Madolffo's plan is to established a World Bank in Europe that would loan money to rival kingdoms to support their military and nation building adventures. Want to fund a large project such as a great wall or palace in your land and lack the ability to pay? The bank would give you a loan to solve your problems. Want to fund an expedition to find new trade routes abroad, or an expedition to a foreign land to genocide the indigenous population in order to establish a colony? The bank would have your back and loan you capital. These loans would come with a 15% - 35% interest rate, burdening the nation with debt that would take centuries to pay off. Bernius's ultimate goal is to spread the bank's influence to the seven kingdoms (Africa, Asia, Europe, Australia, North and South America, and Antarctica) and unite them under a cycle of debt. While leader play their wargames with each other, it will be the bank that holds the strings and profit from it.

However, this plan comes with risk. Nations are always at risk of not cooperating. Some possess massive armies due to their population and may decide not to pay what they owe. If they lose a war, the conquering enemy will ignore the bills of their defeated foe. Nations may simply decide that the bank is a threat because of funding their enemies, and decide to attack the bank directly, destroying it in the process. All of these scenarios result in the banking industry losing money on their investments. The knights Templar also had a banking system, and we know what happened to them. The king didn't want to pay, and had them executed for heresy.

Madolffo always pays his dental, but some of his clients would not. How can Madolffo establish this banking system while preserving it from potential opportunists long term?

Answer 1

You can't.

Getting rid of the Catholic Church, while solving your usury problem (Catholicism forbids Catholics from lending with interest*) creates a much larger problem - the chaos. It's not going to result in a situation where people who have large amounts of liquid assets lying around profit, it will create an environment where people with weapons attack the aforementioned people with large amounts of liquid assets. Banks, an institution which practices loaning and storing money really benefit from firmly established societal rules. In other words, you will be attacked by every petty warlord and would-be conqueror who wants a crack at your fortune. Hiring guards would help, certainly, but the instant anyone gets stronger than you, they will attack you for that sweet, sweet gold. To use a crude analogy you might be familiar with, it's like you're playing the game of RISK and everyone at the table knows that you have five joker RISK cards (somehow) in your hand. Despite your relative strength, everyone knows that the prize of going after you is worth it.

Not to mention that, should anyone default, you don't really have good ways of collecting. Say someone borrows a fortune to fund an army and then loses the war. Where are you collecting the money from? Everything he has will get raided by whoever defeated him. And even if you're funding that guy, that means you're getting, at most, your original investment. Also paper money doesn't exist at this point, meaning that you can't loan against the money in your vaults - you have to actually loan the money in your vaults so you can pretend you have more money than you actually have on hand, which heavily cripples your ability to act as a bank.

Ultimately, the best option for world domination is not lending out your money to tin-pot dictators and petty tyrants who will gleefully stab you in the back, but rather invest in an army yourself and conquer the world, though at that point you aren't really much of a bank.

*Usury, Catholicism, & The Middle Ages: While the modern (and legal) definition of usury is 'lending at an unreasonable rate of interest', this was not the historic definition of usury in the Medieval period, usury was defined then as any rate of interest at all. This was made illegal at the First Council of Nicaea in 325 C.E., though only at first to clergy, it was later applied to all member of faith and was made into a heresy in 1311. It took until 1515 to clearly defined it, though the definition was merely confirming that which has already been understood as what usury means, rather than creating a new definition. As of the modern era, there have been new thoughts of the matter within the Catholic Church, at the very least usury (still defined as any form of interest) has been seemingly rolled back from a heresy to just being a sin. Historically, yes, there are been many devices in order to keep charging usury to get around the prohibition, the most notable of them being forcing Jews to become moneylenders by banning them from every other job, scapegoating them, and confiscating all their wealth; but Bernius Madolfo using an army of Jews to lend money with interest would cause more problems than they solved, namely, because of the aforementioned practice of scapegoating Jews.

Answer 2

Collateralize on the Bleeding Edge of Finance

I think the principle behind the Fuggers example AlexP provided in the comments is to always stay one step ahead of your monarch in financial sophistication.

• If the monarch doesn't understand the value of land, ask for it as collateral
• If the monarch doesn't understand the value of mineral leases, ask for it
• If the monarch doesn't understand the value of exclusive trade routes, ask for it
• If the monarch doesn't understand the value of stock, ask for it
• If the monarch doesn't understand the value of intellectual property, ask for it

You'll need to, in this case (and in the Fuggers example) be ever-adapting, always striving to appear to be holding on to a bunch of worthless assets (whatever form they take).

Spies will tell the monarch about how rich your mines are, or how profitable your trade routes are, so you'll need to innovate frequently.

As your monarch grows "savvy" be quick to negotiate away your claims in part, or in whole, to the greedy autocrat in exchange for the next "worthless" thing.

Be The Central Bank

Become a peer. Instead of loaning money to the monarch, show them how to extract wealth subtly out of the people.

In this way, you are teaching your ruler how to steal the money he or she needs from the public. And, in exchange, the regent temporarily overlooks any amount you might be taking for yourself.

Be in on "the fix", whatever it is, with your monarch. When the gig is up, bend with the new law, and start selling the next "fix".

Examples:

• Teach your ruler the value of paper money, and how they can print their way to prosperity.
• Once the regent understands the ills of inflation, teach him or her about risk pools, premiums, insurance, deductibles, actuarial math and exclusions from coverage.
• One the monarch gets insurance, teach him or her about fractional ownership in companies through stocks, or less-than-fractional-ownership through non-voting stocks and how someone with privileged access can milk system with insider information, or price manipulation.
• Once the ruler gets that, try to teach him or her collateralized debt obligations (CBOs) and mortgage-backed securities, mark-to-market accounting.

Answer 3

Ask the Medici's, they founded a bank in that time frame https://en.wikipedia.org/wiki/Medici_Bank

Answer 4

Not banker. Bookie.

Your bookie calculates odds. Odds of a prince winning the battle. Odds of a mercantile scheme paying off. Odds of a baron refusing to pay his debt. With longer odds of payback comes the possibility of greater return.

Your bookie is not the Iron Bank or the Templars, wealthy in his own right. Neither is he a vault, entrusted to keep safe the wealth of others. In a chaotic world, either role would make him a target. He is a humble person. In a world where the Church is gone I could imagine he is a monk - some relic of a better world that has passed, and so trusted more for what he represents.

He is trusted by wealthy persons (and, maybe, non wealthy persons). Wealthy persons in this chaotic world keep their own wealth safe in their castles. But they might be interested in growing their wealth, or interested in making a bet. The bookie calculates the odds and tells them what the payoff will be.

If the person who needs the money is successful in his or her endeavor, and pays according to agreed terms, then those making the bet win the bet and reap the reward. If the ships sink then the bettors lose the bet.

The bookie makes his small percentage regardless. He is paid to facilitate the transaction. Win or lose, at no point is it his money.

The other benefit: the customers who have put money with the bookie will be aware when an endeavor is profitable but they have not been paid. When they ask him why, he will explain that the victorious prince has declined to pay. The customers know that the bookie cannot force a prince to pay his debt. However, one or more of them might - if not by force of arms, by peer pressure.

Answer 5

There are a couple of problems with this model of lending to warring states.

1. Defeated nations don't pay back debts. If you lend to both sides in a war, one will lose and one will win. The one that wins will be able to pay back debts, but the who loses won't, because the winner will pay their debts with the loser's money.
   I see two ways that this wouldn't create a problem. First, if the animosity never comes to outright war (Cold War-style). Sadly, this is extremely hard to control. You could try lending equally to both sides, but in the end they will clash. In addition, if they never fight each other, no one will win and neither will be able to pay you back.
   The second way to avoid the problem is only to ever back one side. The side with the most funding (the one you back) is most likely to win and pay back their debts. The one problem with this is that once people see a successful business based on this model, they'll likely set up lending agencies of their own and back the other side, so you'd have to raise interest rates to make a profit (since less of the armies you back will win), but also have to lower them again to stay ahead of competition.
2. Winning sides don't pay back debts either. Once a nation has proved itself the most powerful, what reason does it have to pay you back? (You mentioned this in your question.) The most obvious answer is to have collateral, but what collateral can you hold from a world superpower? Anything you have can just be taken back from you.
   The best solution I can think of is to have some sort of alliance between nations you've lent to. If anyone refuses to pay you or attacks you, all of the other nations join forces against that nation. The best reason for this I can think of is self-centeredness. If anyone defeats you and plunders your vast resources, what is to become of them? You could make it part of their contract in lending from you, just to put it into their minds. Even so, there would probably be a flaw at some point.

The question I'm most interested in is how this "good and honest priest" has such massive and unlimited funds at his disposal in the first place. It takes some pretty significant funds for nations to be borrowing from you.