Banking history: how did the Medici Bank and the bill of exchange work?

A Florentine merchant wants to buy wool in London. The road is long and there are many robbers. Should he carry gold in a chest? Medieval Italian bankers found an answer to this problem in paper.

1. From money changers to bankers. According to Britannica, among the first to provide banking services in continental Europe were the changers of foreign coins, that is, money changers.
2. About the word "bank". According to one interpretation, the word comes from the name of the bench or counter (Italian banco) on which money changers laid out their coins and did business. This is not the only interpretation: other explanations are also found in the sources.
3. The Medici Bank. The researcher Raymond de Roover dates the bank's history to 1397–1494. 1397 is usually taken as the year in which Giovanni di Bicci de' Medici founded his bank in Florence.
4. A network of branches. The bank was built around its headquarters in Florence: at various times, besides major Italian cities, it also had branches in London, Bruges, Geneva, Lyon and Avignon. Each branch was set up as a partnership with the headquarters.
5. The bill of exchange. The main instrument was the bill of exchange: money is handed over in one city and received in another city in another currency. Because coins were not physically transported, the risk on the road was reduced.
6. The link with Rome. For a long time the Medici Bank was the main banker of the papal Curia in Rome.
7. Lessons of the crisis. According to de Roover's study, in the second half of the 15th century the bank was weakened by bad debts, shortcomings in management and the difficulty of controlling distant branches; after the Medici were expelled from Florence in 1494, the bank's activity came to an end. This lesson is still relevant today: credit risk and internal control.

Example (prepared by the author, hypothetical). The merchant Lorenzo hands over 1 000 florins to the bank in Florence and receives a bill of exchange. On reaching London, he presents the bill to the bank's London branch and receives local money at the agreed rate. There is no gold on the road, so there is nothing to steal. The idea behind today's international money transfer and letter of credit is exactly the same: it is not money that travels, but an obligation.