I would LOVe to answer this question fully with lots of backed up sources, but I've left my book in Italy.

The book you need to check out is called Medici Money, by Tim Parks.

He does an excellent job of detailing all of the loopholes bankers found while trying to make it in Medieval or Renaissance era europe.

The sin you are referring to is the sin of Usury. This was viewed just as seriously as any of the 10 commandments, and could result in excommunication.

To put it simply: the way they made money on loans was to speculate on currency values.

If I am a Florentine banker and a London Merchant comes to me for money, I can give him a loan in Florins. On the contract it will say something along the lines of "to be paid on x/y/zz, as is the custom." This custom they are referring to are agreed upon duration of travel between major economic centers in Europe. Meaning, bankers knew it took roughly 45 days to reach Europe by land, and 21 days to reach it by sea (made up numbers, do not use as a source). Thus the loan was due to be repaid either 21 or 45 days from the date of the lending.

Over the course of those 45 days, currency would fluctuate. Going from pound silver to kroner to florints and back again generates a lot of currency exchange.

As a merchant, I would fetch the money I needed from a London Medici branch bank, and after conducting my business, pay back the Medici in pounds. Because the money was input in Florints, Paid out in Pounds, and paid back in pounds, there were many opportunities for the values of these currencies to change naturally.

Eventually that bank would send money (in the form of a loan document) back to Florence with another merchant, where it would be reconverted back to Florints from Pounds, and the Medici would get their money back (even though it never really left).

The speculation was that the value would be increasing, so they could stand to receive significant returns in their investment, without technically charging interest on the loan.

Also, another thing to note is that travellers did not travel with cash on the road, as that would have resulted in robberies. Instead they received contracts from banks or institutions, which would be redeemable at their final destination. The Medici bank branches all over the world kept master lists of signatures and examples of handwriting from all of the managers of each branch, so that forgeries could be identified. If you were a pilgrim going to the holy land from France, you could give 1000 to the Templar Temple in Paris, and then retrieve 1000 gold pieces from the Templar bank in the holy land.

I say this so you can understand that money didnt really leave the hands of the bankers.

I know this subreddit wants sources for all of its comments, but the most specific I can get is the first 3 chapters of Medici Money by Tim Parks. It addresses this question exactly, answers it expertly, and is one of the most interesting topics (IMO) in the entire book.

Hope this helps answer your question!

Am I remembering correctly that this was one of the major reasons for medieval Europe's love-hate relationship with the Jews? Not being constrained by the usury laws (but being constrained by other laws from entering many professions), the moneylending business was a major trade within the Jewish community. So they're handy if you need money, but when it's time to pay it can get a bit nasty.

That was something I heard in conjunction with the pogrom in York in 1099, at least.

The concept of Usury meant different things to different people at different times. You, right now, probably do believe in some form of usury: if you needed money and I offered to loan it to you at 200% interest, you'd call me a "loan shark". Many people would consider what I do to be illegal, or even immoral.

The same goes for the Middle Ages.

Many church commentators decried the idea of charging interest for lending... Thomas Aquinas famously argued against it. Yet it happened pretty much everywhere, especially into the high and later middle ages during the "Commercial Revolution." Why? Because it's absolutely necessary for doing business. Churchmen crying about it and Popes banning it really didn't affect much. Some governments, such as the Crown of Aragon, codified it and simply said that Usury constituted charging more than 15% interest on money lent. Money lending was one of the biggest industries of the Middle Ages

There is this idea that what the Church said (capital C, as in...the Pope...and several other guys) constituted Christian religion during the Middle Ages. It's wrong. Of all the documents that survive the middle ages, the great commentators are certainly the loudest; but they're not representative of "medieval society" or "medieval people" or even "medieval Christians" as a whole.