Money and Promises
Seven Deals that Changed the World
By Paolo Zannoni
The Bank of England was one of the greatest inventions of the 17th century. Championed by a visionary Scot named William Patterson, the bank introduced the first public debt instrument that allowed the English state to raise millions of dollars to feed its citizens and fund its many wars. How the English state was able to convert public debt into cash through the alchemy of "bank money" is one of seven historic innovations explored by historian and banker Paolo Zannoni in "Money and Promises."
Zannoni, a former partner at Goldman Sachs who is currently the executive deputy chairman of the Italian fashion house Prada, starts with the premise that city-states were able to flourish through banking innovations and their complex interdependence with banks. He traces the roots of modern banking by looking at seven historical periods in which cities, states and banks flourished: 12th-century Pisa, 17th-century Venice, the early years of the Bank of England, Imperial Spain, the kingdom of Naples, the United States during the American Revolution, and Bolshevik Russia from 1917 to 1923.
From the first public debt instruments to the extension of credit, banks provided stability and efficiency to city-states, allowing them to convert debt into bank money as a means of payment. Zannoni is a dogged researcher. He was a postdoctoral research student at the University of Florence long before he embarked on a global business career that included becoming president of Fiat USSR and Fiat USA. He has traveled the globe for armchair readers, digging up ancient artifacts in wooden boxes in museums. He even recounts spending time as a student at the Cafe Landolt, a popular Geneva hangout of Vladimir Lenin, where he tried to track down the table where Lenin always sat — but was unable to find it.
Though his examples of city-states are politically varied, and the banks themselves are structured differently, they tell a story of banking innovation that allowed political systems to thrive.
One of the most remarkable achievements was the British Parliament's experiment chartering the Bank of England, whose purpose was to turn public debt into money. Zannoni explains how this was accomplished through the bank's directors and the Exchequer structuring and executing early trades using tallies, or sticks, some of which still survive today.
Tallies formed the backbone of the English money market system that "set the pattern for over 300 years of transactions between the Bank and the English state," Zannoni writes. Tallies were issued by the bank and traded as debt securities based on the promise that the English state would repay investors. The alchemy of banking was created because directors of the Bank of England agreed to issue interest-bearing notes with details of the purchasers recorded in a ledger, with the Bank of England selling the state's debt to the public for a fee. The fee covered the costs and risks of banking — and public debt was transformed into cash without the exchange of silver or gold coins. Zannoni even traces the details of the first debt issuance to a single page in a ledger in 1694. Some of the tallies were stored in the cellars of the House of Parliament. A few are currently locked in a vault in the Bank of England Museum.
The book jacket of "Money and Promises" shows six bones — ancient artifacts marked with symbols and notches that serve as financial instruments of old — recording the exchange of goods, services and commodities. Because silver and gold coins were scarce, medieval European city-states like Pisa and Venice constantly struggled with debt and the ability to finance trade. Both cities were able to expand by exchanging debt for bank money.
"The strange alchemy of banking had magically given floating public debt the purchasing power of newly minted gold and silver," Zannoni writes.
In Venice, the founding of the Banco del Giro in 1619 provides one of Zannoni's seven examples of innovation. The bank created the first bills of exchange that allowed debts raised in Holland and England to be settled in Venice without using coins, funding the republic's ambitions as a maritime power and expanding the total money supply. The Banco Giro's trades were some of the most complex international financial transactions of the period. Zannoni explains how the Venetian mint deposited 130,000 ducats of silver in the Banco Giro and immediately received purchasing power worth 780,000 ducats.
No history of money would be complete without an explanation of how the Catholic Church shaped banks and banking for centuries. It began when the Franciscans, a religious order, started sponsoring charitable financial institutions, known as "good banks," or charities of Naples. To get around usury laws, the Catholic charities applied for licenses to issue bank debt that involved the "renting of coins" to the poor and the taking of deposits from the affluent, launching the beginning of what would become modern-day microfinance. A good deal of banking might not have happened had Pope Leo X refused to give his blessing to the renting of coins to the deserving poor in 1515, allowing the charities to charge fees for doing so. Certainly no one at the time called them "junk fees."
Zannoni is a lively raconteur, able to explain complex financial terms to the general reader. Published by Columbia Business School, "Money and Promises" is a handsome book filled with reproductions of old ledgers, bills of exchange, maps and even current photos of old bank branches. The facade of Banco Giro still exists even though it is now a restaurant, but the bank survived for two centuries, a testament to the relationship between bank money and economic growth.
In Zannoni's telling, the best banks are those that work hard to be profitable but also use their unique ability to create money in a way that benefits the community — a difficult balance to achieve. "Dividing the power to make money between the state and bank requires constant vigilance," he writes.
