The following is Methods of Prosperity newsletter number 2. It was originally deployed June 29, 2023. As of March 7, 2024, original subscribers have received up to issue number 38.
My motivation is to discover what is true, accurate, evidence-based information. For the purpose of discovering what fundamental principles underpin the systems and processes of creating generational wealth, my plan is to grow our community. Am I crazy for sending out a newsletter like this?
This is not financial advice. You can be certain that there are misconceptions and cognitive biases interwoven. I guess that’s a disclaimer.
Corrections from last week’s newsletter, Methods of Prosperity no.1
Last week I mentioned that promissory notes were invented by the Tang and Song of 7th century China. The Song Dynasty of 11th century China invented paper money, which was a form of promissory note. The Tang Dynasty of 7th century China also used paper currency, but it was not in the form of promissory notes. The promissory note is a legal instrument in which one party promises in writing to pay a determinate sum of money to the other party, either at a fixed or determinable future time or on demand of the payee, under specific terms and conditions.
There’s overwhelming evidence that – how do I say this – money lending is historically a Jewish specialty. At least as early as the 9th century, the first check was written. The check found was written by a Jew from Baghdad to a Jew in Cairo, and it read, “Please give Joseph, the bearer of this check, a hundred coins,” and it’s signed.
Part 2: The significance of double-entry accounting (The Medici Family, continued).
Ah, the Medici family, a name that rings through the annals of history, particularly during the Renaissance. They were indeed a powerful family, and their influence was felt not only in Florence, but across Europe. Their rise to power was facilitated by many factors, one of which was their mastery of the financial arts, including the innovative use of double-entry accounting.
Double-entry accounting, a system where every entry to an account requires a corresponding and opposite entry to a different account, was a revolutionary concept in its time. It provided a more accurate and comprehensive view of a business's financial situation, allowing for better management of assets and liabilities than any recognized system prior to Northern Italian commerce in the fifteenth century. This system was not invented by the Medici, but they were among the first to use it extensively in their banking operations.
Let’s zoom out for a moment to get a sense of the advancements which allowed for this innovation. Leonardo da Pisa, popularly known as Fibonacci, published a book called “Liber abaci (Book of Calculation)”, in 1202. Fibonacci contributed detailed advancements in arithmetic that were foreign to Europeans at the time, as well as accounting techniques that mirror methods used by merchants from India and universities from Islamic Spain. This knowledge allowed for double-entry accounting to exist. Mathematician Luca Pacioli informed the newly emergent banking system which the Medici would be famous for. Pacioli taught mathematics to Leonardo da Vinci and composed a book with him titled, “Divina proportione (Divine proportions)”, about architectural mathematics. Pacioli would become famous for his prior work, “Summa de arithmetica, geometria, proportioni et proportionalita (Summary of arithmetic, geometry, proportions and proportionality)”, in 1494, which gave Pacioli the nickname: “the father of accounting and bookkeeping”.
The innovation of double-entry accounting played a significant role in the rise of power of the Medici family during the transition from the Middle Ages to the Renaissance, particularly with regard to providing credit to fund the Catholic church. The Medici family was recognized as the world's first banking powerhouse, and the invention of double-entry bookkeeping can be traced to slightly before Giovanni de' Medici opened the first of the family banks in 1397.
The Medici Bank, founded by Giovanni di Bicci de' Medici, was one of the most prosperous and respected institutions in Europe. The use of double-entry accounting allowed the bank to track debits and credits accurately, manage risks more effectively, and maintain transparency with their clients. This increased the trust that other parties had in them, which was crucial in the banking industry.
The Catholic Church, a significant power during the Middle Ages and the Renaissance, was one of the Medici Bank’s most important clients. The Church required vast sums of money to fund its operations, including the construction of churches, the commissioning of artworks, and the financing of wars and crusades. The Medici Bank, with its innovative accounting practices and reputation for reliability, was well-positioned to provide the necessary funds.
Let’s go back in time for a moment, to Roman-occupied Israel; a.k.a. “Palestine”, in order to know how money informs behavior.
In the Christian scriptures, Jesus overturns tables of the money exchangers in the Temple, going so far as making a whip of cords and driving them out. This is recorded in John 2:14-16 and Matthew 21:13. The Jewish Temple received taxes and payments in exchange for sacrificial paraphernalia. At this time and place, mixed currencies were in circulation. So if you had Roman coins, they had to be exchanged for shekels. The shekels authorized for payment of temple taxes were minted by the Phoenician city of Tyre. The Tyrian Shekel was a silver coin that always had a high level of silver, between 90 and 95 percent. The Jewish Temple required every male Jew over the age of 20 to give an annual contribution of "half a shekel". In the first century, a shekel was equated with the Greek tetradrachm, which was a silver coin of nearly 14 grams. Half a shekel, therefore, would be in the value of nearly 7 grams of silver, and could be equated with the Greek didrachm. The value of about 7 grams of stamped silver was estimated to be similar to the wages of a day’s work in a vineyard, which was “one Denarius”. Since there was no standard on the exchange rates, the money changers could charge whatever they wanted. They also could charge extra for a required kosher animal needed for religious sacrifice. See how that could get messy?
But here’s where religious hypocrisy enters the chat. Now, in the Middle Ages, anti-Jewish attitudes had become pervasive. Understand that Jews had been prohibited from most work except for lending money. The Catholic church considered usury a sin, which means the Medici bank couldn’t charge interest on a loan to the church. The only problem was, the church needed funding to support their lavish lifestyle. For the first time in history, the merchant class held the gold. You’ve heard of the “Golden Rule”? The man with the gold makes the rules.
Instead of charging interest to the church, the bank of Medici arranged a workaround that wasn’t considered a sin. The church would receive letters of credit in return for a monetary “gift” to the Medici bank’s balance sheet. In practice, this workaround was technically not usury but served the same purpose.
By providing credit to the Church, the Medici family gained significant influence within this powerful institution. Several members of the family were even made cardinals, and four became popes: Leo X, Clement VII, Pius IV, and Leo XI. Two queens of France were Medici: Catherine de’ Medici, and Marie de’ Medici. This religious and aristocratic influence further increased the power and prestige of the Medici family.
And that’s how double-entry bookkeeping helped the Medici family generate enormous wealth that they used to sponsor the greatest artists of their time.
Next week we’ll fast-forward to the next extremely rich person in history, Jakob Fugger.
–Sean Allen Fenn
