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Someone tell the Vatican: Monarchy and banks don’t mix

Why Europe’s last kinglike ruler has a serious problem on his hands—and we might, too

A depiction of the interior of a bank owned by the Medici family of Florence. Woodcut, Italian, 15th century.The Granger Collection

As Pope Francis sets the course for his young papacy, one of his first challenges has nothing to do with theology or the behavior of the far-flung priests and bishops he supervises: It is to reform the troubled Vatican Bank. A private and highly secretive institution estimated to control more than $7 billion in capital and more than 33,000 secret accounts, the Institute for the Works of Religion (its official name) has long been dogged by scandals and questions.

Founded in 1942 to “safeguard and administer” the funds of church members, it has become a modern symbol of the hazards of secrecy in finance. It was accused of holding Croatian Nazi funds during World War II and more recently has faced continued suspicions of money laundering for the mafia.

Publicly, at least, the bank is making efforts to push back against this reputation. Ernst von Freyberg, who became the bank’s chief in February, has characterized it as “very, very safe,” and pledged to clean up the scandal-racked institution. He has retained an American law firm to help the bank meet international anti-money-laundering and terrorism finance standards.


But if history is any guide, Francis and von Freyberg face a difficult task. Effectively, the pope is the last absolute monarch in Europe, a single individual with total authority over the city-state’s government—and this extends to its banking arm, which he personally oversees with the help of two boards of advisers. The Vatican is essentially trying to run a modern bank within a monarchy. No matter how sincere reformers of the Vatican Bank are, they are up against an age-old problem: The long history of European banking suggests that secretive, absolute government and long-term successful banking do not coexist well.

From the 1300s to the modern era, absolute monarchs—unaccountable to boards, investors, and even their own people—have had a poor track record of managing money, paying debts, and managing banks within their borders. Some of Europe’s most powerful banks foundered and even collapsed when confronted by the unpaid debts of the monarchs they lent to; others failed simply because they had trouble gaining trust from financiers and merchants within a system that didn’t require openness.

The incompatibility of banking and monarchial secrecy is more than just a problem for the Vatican. As banks themselves rise in financial and governmental power—and as secrecy, opacity, and impunity come to define modern finance—it is tempting to wonder whether banks themselves are starting to embody many of the same risks of the monarchies that once endangered them, and thus jeopardizing our financial stability in ways that Europeans of previous times would have found entirely too familiar.



The Vatican’s entwinement with banking goes deep into history; in fact, modern banking as we know it actually has its origins in the Medieval papacy. In the Middle Ages and Renaissance, the Apostolic See (as papal government is called) was among the wealthiest entities in Europe, with complex financial needs. The church transferred funds to and collected taxes from every corner of Europe. The money was used to hold multiyear council meetings; to build palaces, churches, charitable organizations, schools, shrines, and libraries; to bankroll its imperial courts and diplomatic corps; and to raise large armies to defend its territories.

Beginning in the 1300s, however, instead of operating its own bank, the papacy relied on the outside banking houses that had arisen in Italy, the Medici house foremost among them. These family-run banks flourished by following some basic rules. Unlike the popes and kings of his day, banker Cosimo de’ Medici maintained strict training, professional rules of financial management, and internal and external accountability, keeping clear double-entry books that balanced income and expenditure. He performed audits on his branches and was forced to submit his own books (albeit a set specially prepared to be appropriately modest) for the Florentine tax assessors.


Modern finance and accounting was one of the great societal leaps of the Renaissance, and as banks spread through Europe, they helped fuel trade, industry, and art across the continent. They also amassed great pools of capital. Like popes, kings and other great nobles did not do their own banking, and they began turning to the heavily capitalized Italian and German banks to provide funds. To banks, the royals were tempting clients, often deep in debt from wars and maintaining their sumptuous courts. Loans to monarchs were enormous and potentially very profitable, and they brought banks prestige and an entrée into national markets.

But, because the monarchs simply weren’t answerable to anyone, they also carried peculiar risks. Piero de’ Medici, son of Cosimo de’ Medici, warned his own son, Lorenzo the Magnificent, not to make loans to monarchs, as they involved more “risk than profit.” Lorenzo ultimately lost much of the family fortune by ignoring his father’s advice: The head of his Bruges branch made massive loans to Charles the Bold, the untrustworthy Duke of Burgundy, who died with so much unpaid debt it eventually unraveled the Medici bank. (Lorenzo realized that the Medici would fare better as princes and popes rather than bankers: His son Giovanni de’ Medici would become Pope Leo X in 1513.)

These kinds of collapses would become a pattern. As European banking grew, it crashed time and again into the practices of its royal clients. The wealthiest bankers of the 16th century were the Fugger family of the Bavarian city of Augsburg, who had built their unparalleled fortune on international trade, a pan-European mining operation, and a banking network almost three times the size of the Medicis’. To maintain this financial and industrial empire, they were obliged to lend money to the Hapsburg Holy Roman Emperor, Charles V, and his son Philip II, king of Spain. On the face of it, being bankers to the Spanish Empire offered vast rewards from the tons of gold and silver that were arriving from South America. But the overextended Philip struggled to manage his finances, and indeed refused to even look at his ledgers, deeming it beneath him. With its imperial debts outstanding, the giant Fugger bank began to falter, and the family retreated from finance. (A counterexample would eventually emerge in the Rothschild dynasty, which succeeded in banking to kings—in part by building an international asset network whose secrecy and inscrutability rivaled any monarch’s.)


Banking ran into a different kind of obstacle in France. The French monarchy became the biggest and most powerful in Europe, but was plagued by financial mismanagement and massive debt. In 1720, with the monarchy effectively bankrupt, the ruling regent tried to create a modern bank and currency system with the help of the Scottish financial innovator and gambler John Law. The results were quick and dire: With no accountability, and no venue for political debate about France’s monetary policies, the French Royal Bank became tangled in Law’s secretive pyramid scheme, known as the Mississippi Bubble. When both the bubble and the bank crashed in 1720, the monarchy and the public lost all confidence in banking; the regent shut down the Royal Bank and the French stock exchange. France would not succeed in creating a true national bank until 1800.


Where European banking flourished, it tended to be in the freer air of nations like Holland and England. Holland was a republic with an open political system, famous for its freedom of information and religion. England, by 1688, had a constitutional monarchy in which state financial matters were negotiated and debated publicly in Parliament and in the nascent press. Even more, these nations had relatively open financial institutions. The Bank of England was established in 1694 and is still healthy, despite scandals from very early in its history. When the English South Sea Bubble burst in 1720, in which the Bank of England was partially implicated, there was a public inquiry that led to reforms—and, unlike in France, the survival of the British central bank and stock exchange. The Bank of England ultimately allowed the British government to manage its enormous debt and outpace France in military and colonial spending.


In the last year , the Vatican Bank has made some moves in the right direction—last year its board stepped in and fired chief Ettore Gotti Tedeschi, accused of money-laundering by the Italian authorities. But with no voters or regulators to answer to, the bank and its patron state still share more characteristics with the closed monarchies of the past than with the open systems that survived them. And it is unlikely that its nominal head, Francis I, will want to put his nose deeply in the books.

Though the Vatican’s model of finance would seem long obsolete, there are ways that modern banking is now moving closer to that old value system. China’s most powerful banks are largely black boxes, beholden to a regime rather than to empowered shareholders. The West’s top banks have grown into some of the world’s wealthiest international entities, capable of hiding debts and obligations in much the same way monarchial governments did. And bankers have acquired, like absolute monarchs, an aura of unaccountability, with the ability to tamp down regulation and avoid culpability. So far, for instance, not a single American banker has gone to jail for the 2008 financial debacle.

This princely power might seem desirable to those that hold it, but history suggests it’s at odds with the trust we require from our bankers. As a society we—and, in the end, the banks themselves—are better off the less they look and act like kings.

Jacob Soll is a professor of history at the University of Southern California. His new book, “The Reckoning: Lessons from the Perilous History of Financial Accountability from the Ancient World to Modern Wall Street” (Basic Books), will be published next year.