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Tuesday, December 20, 2016

Netflix Does the Birth of Modern Finance, with Drama

The series on the Medici family of late middle ages tells the story of the early years of capitalism.

It’s a time of dramatic social change, and this is destabilizing all politics, even birthing a new world. The aristocracy is losing power to a new commercial class of innovators. The new creed is not to rule, but to serve.

To be royal once meant to run the world, but no more. The royals now are out of money and they turn to the new wealth of a class of creatures who have seized on new technologies. These new technologies have, in turn, created new opportunities for unprecedented ways of making money. Instead of making things, these people are providing services people need, and this is making them enormously rich.

But every once in the while, the Black Death comes along to ruin it.

That’s because the above description pertains to the 1400s in Italy, a time given beautiful cinematic life in the new series on Netflix, Medicis: Masters of Florence. The first season deals with the second generation of bankers during the lifetime of the founder of the empire, Cosimo di Giovanni de’ Medici (1389-1464). His two sons struggled for the control of the growing empire.

Here was a period when modern commercial finance was born. More than that, we see here the birth of modern commercial culture – a new system of social organization that overturned ancient expectation and norms about who rules and who obeys. Commerce was a new force in society, one that liberated the masses of people from the old order. Feudalism was becoming a thing of the past, as waves of the European population picked up and moved from historic lands to new commercial centers such as Florence. Commerce changed everything, from art to architecture to music to sexual norms. Everything people once thought were permanent features of life came into question.

The Medicis labored under two burdens inherited from the old world.I was disappointed that the series didn’t have much banking in it, since this was my primary interest. The focus instead might be predictable: the loves, emotional conflicts, and personal lives of the main characters. However, if you stick with it, the big economic themes do make an appearance, and accurately so.

You gain a clear delineation between the forces of reaction and the forces of progress. The Medicis labored under two burdens inherited from the old world. First, they were merchants, and the merchants had never been highly regarded in society. Second, they were constantly under fire for the suspicion of usury, which was then condemned by the Catholic Church.

Permit me a quick departure on the second question.

The Usury Question

The Netflix series shows the Medici family scrupulously avoiding what was considered to be Usury. This was condemned from the earliest years of the faith, but this condemnation ended in the 16th century, liberalized in law by the 18th century, and is today not even an issue. It is hardly talked about at all apart from perfunctory warnings against usury (and what the difference between interest and usury is precisely has never been spelled out).

As even the 1912 Catholic Encyclopedia said: the Church “permits the general practice of lending at interest, that is to say, she authorizes the impost, without one’s having to enquire if, on lending his money, he has suffered a loss or deprived himself of a gain, provided he demand a moderate interest for the money he lends.”

This view amounts to a complete reversal of a view that prevailed from the Patristic age until the high middle ages. During all these years, the Church stood squarely against the institution of interest – as opposed as Islam, or even more so. This only began to change with the development of sophisticated monetary institutions in the Medici period. These allowed theologians to consider the topic more carefully and come to realize that interest is no different from any price on the market – something to be freely negotiated by the parties involved and reflecting the changing conditions of supply and demand.

One of the earliest statements against interest comes from the Council of Nicea, which sought to crack down on avaricious practices among the clergy, among which was lending money at a profit. The Council condemned this and other attempts at “dishonourable gain.”

It was surely a wise teaching, necessary to stop corruption, but there was a slight problem. The Council broadened its mandate beyond the priesthood and implied that the practice was universally wrong. It added scriptural proof from the Psalmist that interest itself was immoral. “He that hath not put out his money to usury [interest], nor taken bribes against the innocent: He that doth these things shall not be moved for ever.” The implication was that the rule pertaining to clergy really reflected a general social principle.

The war against interest was a war against basic economic logic.And thus began a long tragic history of the Catholic Church’s 1000-year war against interest and the money-lending profession. And it is a strange war indeed, one undertaken with little to no substantive basis from scripture (the above hardly suffices). Attacking lenders as heretics contradicts normal commercial dealings. It even contradicts Jesus’s own parable of the talents, which presumes and praises the existence of money lenders and condemns the failure to give them idle money as profligacy itself.

The war against interest was a war against basic economic logic. Present goods are more valuable than future goods, so it makes sense that the person who wants something earlier rather than later, but doesn’t have the money now, is likely to pay a premium. Furthermore, lending is always risky so it makes sense that there should be a reward attached to undertaking that risk. Finally, money that is lent out is not otherwise employed by the owner and, therefore, there is an opportunity cost that will be paid and compensation for this sought. For all these reasons and many more, interest is a normal part of peaceful commercial society.

Chickens and Eggs

To understand this, it is helpful to consider the case of barter in a desperately poor society. Let’s say you have two chickens but only need one. A fellow comes along and wants the other one but has no money. He offers a potato – a pretty shabby deal overall for straight one-for-one trade. But, even so, you want him to have the chicken and you aren’t currently in need, so you propose a deal. He can have it if he gives you some eggs from the chicken for a period of one month. After that, he can have the chicken.

You are happy. He is happy. Everyone wins. But why the egg premium? He wanted the chicken now and you didn’t need it now. So he pays to feed his more urgent need, and you are glad to relinquish control of your chicken provided there is a stream of income coming out of it. This is the way interest works in a barter economy. True, there is no money involved, but the principle is the same as that which is considered a normal part of commercial life today.

And truly, the Church never objected to this sort of deal. After all, on what possible grounds could one object? It is mutually beneficial in every way. No one is ripped off. All is transparent. One could even say that society is far better off this way. The alternative is that one person is without food and the other person holds an idle resource. Better to achieve a great degree of social harmony with this kind of deal than to settle with the inferior alternative.

The introduction of money to the story changes nothing of moral substance. This is because money is nothing but a proxy for goods. It is the most valuable good in society, something acquired not to consume but to hold and trade for other goods. Money also serves an important bookkeeping function: you can’t often add and subtract bartered items (a cow, an apple, and an iPad can’t be aggregated), but you can manipulate figures in monetary terms.

From a Catholic angle, there is an additional issue that concerns a difficult topic: Jews. But for some reason that is unknown, people’s brains go haywire when the subject of money comes up. They presume that something evil must be going on because the exchanges become complicated and well-developed. How is it that people can get rich not by making things but merely by arbitraging between the present and the future? Isn’t there something morally suspect about this practice?

Before the high Middle Ages, it was uncommon for most people to have any money at all. Most peasants worked for food and directly traded the wares they made for food. Economies were local and financial institutions were available only to the very rich and powerful. Handling money was not a common experience for most people. It might have appeared that the buying and selling of money itself was the sole province of the sinful.

From a Catholic angle, there is an additional issue that concerns a difficult topic: Jews. They tended to be the money lenders. This posed a problem in a time of intense religious and sectarian concern. In fact, you often find this issue appearing in Church legislation in the middle ages: all kinds of prohibitions and leniencies name the Jews in particular. (Read Milton Friedman on the implications this had on the Jewish attitudes in the 20th century toward socialism.) 

Later in the Middle Ages, starting in the 15th century, economies began to change dramatically. Feudalism was giving rise to capitalism, money and finance were becoming a growing part of everyday life, and the buying and lending of money was less the exception than the rule in a commercial life that was reaching an ever-wider swath of the population.

Enter the Medici Family

Catholics themselves became big players in the emerging world of high finance, particularly with the banking family of the Medicis and, later, with Fugger family, which had taken over the role of economic dominance from the Medici family.

It was the neo-Thomists who started the process unraveling traditional teaching and cleared the path for the full legitimization of interest. The first great strides were made by Conrad Summenhart (1465-1511), the chair of theology at Tubingen. He began to make exceptions to the strict doctrine. He wrote that money itself is fruitful, a good that can be bought and sold like any other.

When a money-holder lends, he is giving up something that would be otherwise profitable, so he should be compensated for his loss, same as any merchant. Moreover, Summerhart said, it is helpful to think of the money paid in exchange for lending services as a different good from the money itself – that is, possibly, as a gift given to the lender as a sign of appreciation.

Summenhart didn’t go all the way to license interest but he said that if neither the borrower nor the lender thought of it as such, it was permitted. Thus was interest reduced to a state of mind rather than an objective fact. This represented great progress in Church teaching.

The next and final step in the liberalization of interest was taken by Thomas De Vio, Cardinal Cajetan (1468-1534). He was the leading Catholic theologian of his day, a favorite of the Pope, and a defender of Catholicism against Martin Luther. His writings represented the most sophisticated of his time as regards economics. He completely endorsed Summenhart’s teaching and took it a step further, saying that any loan contract was legitimate if both the borrower and the lender agreed to it in anticipation of some economic benefit. He carefully took apart St. Thomas’s own writings on the topic and demonstrated that it was perfectly just for the lender who is giving up use of his property to charge a service fee in exchange.

Since those times, there has been no real debate in the Church on this question. Yes, usury continues to be warned against, though no one makes the attempt any more to distinguish between interest and usury. They were once considered synonymous; today they are distinguished as a reflection of a continuing bias against lenders who would seem to display more avarice than charity in their work. But in practice, there is no clear difference. What’s more, even seemingly usurious loan rates serve a social function: the higher the rate of interest, the more saving is encouraged and borrowing discouraged.

Economics is not the primary domain of Church competence in any case, and sometimes the line that separates economic theory from faith and morals can become blurry indeed. If nothing else, this history should instill a bit of humility on the part of Church teachers, and a cautionary point as regards economics and other sciences.

New Riches

Technically, this is not usury, despite widespread public suspicions.There are several moments in the Medici series when the voluntary nature of the Medici business comes into clear focus. Some of them concern investment in new businesses. The Medicis have money and are happy to invest it in other enterprises provided they get a just return. Technically, this is not usury, despite widespread public suspicions.

Many other areas of exchange, not exactly voluntary, concern marriage. The Medicis needed the protection the royal families would provide, and the royal families need Medici money. The sense of lost love serves as the template for the inevitable romance drama of the show.

Where did the Church stand in the midst of all this upheaval? Somewhere in the middle. The Church too needed money, and the Medici family experienced a great deal of success in trading money for position within the hierarchy, which itself was valuable because of the Church’s huge influence over politics. Several Medicis later took control of the Papacy itself.

The Medici family valued political protection (Machiavelli was its most famous adviser). It need political stability in Florence. And it needed protection against populist uprisings from envious and confused members of the rising middle class, which were clueless about why anyone should be able to become rich without actually making anything. They needed to keep these populist movements at bay in order to assure an environment favorable to business.

The world of the Medicis is not altogether different from our own. We just have fewer arranged marriages, and a lot less Black Death.What I liked most about the series was the presentation of the Medici family as the most socially progressive force in late medieval life. They worked to bring wealth and opportunity to everyone regardless of life station. And yet, without exception, when a plague would appear, people would blame the Medicis because, surely, this is the wrath of God against the usurers. Of course! Yes, the 15th century had its own Occupy Wall Street movement.

Regardless, that the Medicis represented social progress is historically correct, and reminds me of the great and wonderful essay by Benjamin Constant: The Liberty of the Ancients Compared with the Moderns. The rise of modern commerce redefined the meaning of liberty itself. In the ancient world, to be a free citizen meant that you had influence over the affairs of state. In the emerging world of the late middle ages, liberty belonged to everyone, but it primarily meant property rights and access to the commercial sphere of life.

It is this second form of liberty that formed the basis of the Scottish Enlightenment, the birth of liberalism, the American Revolution, and the central dynamic of commercial progress today.

We can too easily forget how long it took this revolution to develop. Its European roots date to exactly the period covered in this Netflix drama. For providing us a window into the world, about which modern students know virtually nothing, Netflix deserves enormous credit. In the end, the theme of this series is that commerce – and commercial finance – is a source of liberation for humanity from the forces of power and reaction. And that alone is a fine takeaway.

As the centuries moved on, this dynamic became ever more obvious and present in people’s lives. The same dynamic lives on today, though it is not as clear now. Defenders of liberalism do need to know this history and develop a sympathy for what these bankers so long ago had to go through just to carve out a space of moral legitimacy for themselves.

We too easily take them all for granted today, but we should never forget that nature provides none of the wealth we see around us. It has to be created, and modern finance has a lot to do with that. The world of the Medicis is not altogether different from our own. We just have fewer arranged marriages, and a lot less Black Death.