How can one create a stable banking system for the middle ages?

[Erebus]

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.

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

 

[goldhawk]

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

He can't. Banking systems are unstable. Look up the Rothschild banks and the "fractional banking system". They're eye openers.
Also search for the "split-tally stick". That's how to create a stable currency. The English did for over 700 years. Then Henry VIII sold it out to the Rothschilds.

 

[skip.knox]

>The English did for over 700 years. Then Henry VIII sold it out to the Rothschilds.

I think you here confuse the persistence of the tally, which was first honored by Henry I and while was still being honored seven hundred years later (until ordered destroyed by the government). I'm not sure how you associate Henry Tudor with that and I'm even less sure how one sells a stable currency. The Rotschilds were not in the banking business until the 18thc.

I do agree that banking systems are inherently unstable, though one inevitably has to be clear about what one means by a bank and what constitutes stability in a banking system. Some banks have lasted quite a long time; I'm not entirely sure what the OP envisions by "banking system." The description of Madolffo makes him sound like Jakob Fugger or Cosimo de' Medici or Anton Welser. But all those individuals built their wealth on commerce, and none of them endeavored to play all sides against each other. To me, that way spells certain disaster, though it might return spectacular profits for a generation or two.

Then again, this is fantasy, so just use some magic to smooth over the awkward bits.

 

[ThinkerX]

Hmmm...an incomplete thought, rooted in a suitably mysterious organization - the Templar's.

Throughout much of the 'middle ages,' the Church acted as the arbiter between (Christian) nations, and if my hazy memory serves, had at least sporadic influence in the Islamic world as well.

The Templar's were a monastic military order sworn to church service, supposedly answerable only to the papacy. At their height, they had strongholds scattered from the middle east to western Europe. For a span of a couple centuries (not sure, this is from memory), they were effectively an international banking organization. As they were also an army backed by the then most potent international organization, they didn't normally get messed with.

Of course, the Templar's were also destroyed in a monumental display of temporal and priestly corruption, so....

 

[Prince of Spires]

I think skip.knox article about banking on this site is a great starting point (History for Fantasy Writers: Bank on It)
One thing to keep in mind is that speed of communication is a big deal with creating a world Bank in the middle ages. If it takes the months for a message to possiblity Australia and another three-months to get a reply then the Australia branch will be pretty much independent of the European one. I would at least have a hard time believing a bank could operate on that scale with communication that slow

 

[skip.knox]

>I would at least have a hard time believing a bank could operate on that scale with communication that slow
Ravens. <g>

Srsly, the Iron Bank is one of my many complaints about ASoFaI. What tends to happen, especially with strong, ruthless monarchs, is if the merchant squeezes them too hard, the monarch simply exiles the lenders and seizes their assets. Sword beats coin.

 

[Saigonnus]

When you can summon gold coins from nothing, or turn iron to gold, is it even possible to have a stable monetary system? I suppose if that is one obstacle out of the way for stability. Generally, a kingdom's monetary system is based on whatever metals/precious gems they have access to for currency. If at any time, one of those sources runs out, then they are stuck with what's already in the system or they have to trade for more of the metal to make more coins. That makes the system inherently unstable from the start.

I could imagine a kingdom that thrives on being organized (to a fault) in which everyone's finances are meticulously kept track of through the use of magical devices and a living person's palm print. I had something similar for a "modern" fantasy idea. the entire system was based on a series of checks and balances (hadn't flesh it out much) centered around fair pricing for goods and services, trade goods etc. The money was all "virtual", not backed by gold or anything like it, and there was an entire "department" of the government making sure the system was stable, that mages weren't unlawfully "adding" currency to anyones account.

 

[skip.knox]

>is it even possible to have a stable monetary system?
Of course, the OP wasn't asking for a stable monetary system, only a stable banking system. But I really do think the OP needs to let us know what he means by the phrase, in order for us to be of much help.

 

[Leonardo Pisano]

You need to create something that has scarcity, cannot be destroyed easily and has either intrinsic value or is accepted by other people as something of value and in demand. Gold and silver are for this reasons money for thousands of years. In your world you can create whatever you want. Say you take salt as something with the aforementioned properties. You cannot have salt water seas and oceans then. Well, take it with a grain of salt.

 

[The Dark One]

I'd say keep it simple along the Templar lines. Promissory notes to avoid the cartage of gold was the original model. What else do you need?

 

[Prince of Spires]

When you can summon gold coins from nothing, or turn iron to gold, is it even possible to have a stable monetary system?

It's not only possible, it is actually our reality.

While no longer gold based, in our current monetary system, "gold" gets created out of nothing all the time. Between December 2008 and October 2014 the FED printed over $4 trillion (effectively creating gold coins from nothing), and the world kept turning. That was exceptional circumstances of course, it but happens all the time. Simple reason is that we want to have economic growth and a little bit of inflation. And to achieve that you need to create more money. After all, you start with $1.000 worth of goods and $1.000 in coins to buy/sell them. You now grow your economy by 10%. You now have $1.100 worth of goods. If you don't increase the amount of money you have, you will end up with deflation (i.e. the value of your money will increase to match what goods you have).

The only thing you need for a stable monetary system is trust. As long as there is trust people will accept money and use it as such an the value will be stable. After all, money, even gold coins, is completely fictional. It's a tool we invented to make trade easier. But gold in and of itself is pretty useless. You can't eat it, you can't use it to create useful products (other than jewelery). The only value it has is that which we assign to it.

To see the value of trust look at the national debt of Japan and Greece. Japan's debt is huge. It's something like 200% of their GDP, about similar in (relative) size to Greece's debt to GDP. However, Japan pays 0% interest on their debt (or close enough to make no difference), while Greece pays 10+% interest. Why? Trust.

You need to create something that has scarcity, cannot be destroyed easily and has either intrinsic value or is accepted by other people as something of value and in demand. Gold and silver are for this reasons money for thousands of years. In your world you can create whatever you want. Say you take salt as something with the aforementioned properties. You cannot have salt water seas and oceans then. Well, take it with a grain of salt.

I disagree.

Salt is a bad example in that is has been used as a money equivalent. Romans partially paid their soldiers with salt. And there is plenty of salt available. It's just that it was useful (you needed salt to presever food before the invention of refrigoration) and difficult enough to get. Which made it valuable.

Paper money (while a relatively recent invention) is not scarce, it's easily destroyed and of itself is not really something valuable. And yet we still use it as money. Gold and silver were used because they were scarce enough, but more so because they were convenient. It's easy to weigh them, relatively easy to manufacture them and it's reasonably hard to mess with.

 

[Leonardo Pisano]

I think you misread what I wrote. My salt example was a tongue-in-cheek reply. If something is not scarce or of no value, there is no reason to use it as a trade "money". Suppose you have a world in which sand is scarce. Nevertheless it's of high demand because you cvan convert it into glass or bake stones from it. Sand now is a store of value.
The reason we have money is because it is neutral in trade. Effectively, money is steering labour. Think about that. Controlling the money flow is controlling labour.

 

[skip.knox]

Until we hear from the OP, we're sort of chasing our own tails. Or tales, as the case may be. What about it, Erebus? Anything useful here? And can you speak to what you mean by a banking system and how one would measure stability and instability?

 

[Gray-Hand]

Madolfo needs to make sure that sufficiently powerful people have an interest in making sure his banks debts get paid.

For example, he could make sure that the Shotcallers in Australia and Africa get a cut of the interest payments from the loan to the king of Asia.

Alternatively, he could make sure that a cut of the repayments on the loan to the King of Asia go to the next five most powerful people in Asia. So his internal rivals will have a reason to make sure that he pays, and a justifiable reason for overthrowing him Or taking some other kind of action if he doesn’t.

From the OP’s description, it really sounds like Madolfo is really just a basic moneylender. He lends money and gets paid back the principal amount plus interest. That’s not exactly a sophisticated business.

If he is going to call himself a banker, he should probably be taking deposits and probably using them as investments to make more money.

If Madolfo is in the business of investing money, then a good way to increase his influence would be to offer the service of allowing his clients to get in on his investments. If he is managing 30% of the King of Asia’s wealth and is responsible for, say 7% of his annual income, the King of Asia is probably going to be much less likely to stiff him on that war loan.

If he is not only lending money to world leaders, but also managing their money for them, then he has serious influence over them.

 

[skip.knox]

The OP specified Middle Ages. Just so folks know, there was no deposit banking during the Middle Ages. They facilitated the movement of money and making large-scale payments. Moneylending was a major part of their business. And banks often were simply an arm of a family's larger commercial enterprise.

As for moneylending specifically, at the scale of the nobility, it could become complex. This is because one of the chief assets of a noble was land, which includes natural resources like mines. The noble in need of quick cash would put up some of his land, not merely as collateral but also as a way to pay back the loan. The lender was granted the income from that resource, sometimes was even granted the right to manage that asset, for a period of years. Many nobles managed to default anyway, with the result that merchants could wind up being rather significant landowners. Anyway, the whole affair could become quite complex. This, I should not, is all pretty much mid-14thc and later. Earlier was much more modest, and earlier than about 1100 there were no banks at all.

The OP is free to ignore all this in the actual story, of course. Just providing this for reference.