The Art (and Mystery) of Exchange

The Church’s ban on usury and the images of usurers burning in hell troubled lenders and borrowers alike. But people needed loans and there was no point in lending without a return. It was important to find a solution that was not just ‘a way around’ the ban, but that really did not seem to be usury at all.
The letter of exchange was a “most delicate invention” and “a most subtle activity,” wrote Benedetto Cotrugli in 1458 and what’s more “impossible for a theologian to understand.” For more than 200 years it allowed bankers to make a profit on loans without feeling they were usurers.

Foreign currencies were not usually held in quantity in any one town, so if someone wanted to change florins into, say, English pounds, the florins were handed over in Florence and the pounds picked up in London. Officially, travel to London took 90 days, so someone kept the florins a while before repaying. Since the exchange rate was always more favourable for the local currency, in London a similar exchange deal could be made to turn pounds back into florins, such that after another 90 days, in Florence again, there might be a profit of 10 to 20 per cent.
The letter of exchange tied finance and trade together as distance and exchange rates substituted for time and interest rates.