Friday, March 21, 2014

The Perpetuities of Venice: Favored Investment of the Fourteenth Century 1%

From Global Financial Data:

When most people think of Venice, they think of the visuals of Venice: the canals, the gondoliers, the paintings by famous artists such as Canaletto or Titian, the Bienniale, or St Mark’s Square (named after the saint whose relics the Venetians stole from Alexandria in 828 by hiding them beneath pork to get them past the Muslim inspectors) and its pestering pigeons.

When I think of Venice, I think about three things. I think about the first time I went to Europe with my dad. For an entire week before we got to Venice, all I heard about was his insistence on going on a gondola, and passing through the canals while the gondolier sang his Venetian songs.  By the time we got to Venice, I was so sick of this that the first thing I did was take him to the place where you hired gondoliers so I would never have to hear about the canal ride again. My dad asked our potential gondolier how much the ride was, and when he found out it was the equivalent of $50 (this was a long time ago), he swore at the gondolier and said he wasn’t wasting $50 on a stupid boat ride. I was ready to kill my dad, but I didn’t cherish the idea of spending the rest of my life in a Venetian prison and having to pass over the Bridge of Sighs.

Since I am an economist, the other two things I think about deal with finance.  First, Venice was one of the three city-states in Italy (Florence in 1252, Genoa in 1253, and Venice in 1280) that reintroduced gold into the Italian peninsula eight centuries after the fall of Rome.  The other important financial contribution that I associate with Venice are the prestiti: the government bonds Venice began issuing in the 1100s to fund its wars.  The prestiti were the first Eurobonds and if Moody’s and S&P had been around in the 1300s, they would have been the first AAA-rated government bonds, though they eventually would have been downgraded.

Venice was the first country to issue government bonds to its citizens in the same way governments currently issue government bonds.  Before the Venetian prestiti, and even after, kings, queens, emperors and others borrowed money to fight wars or feed their royal megalomania.  When the rulers were unable to pay back the loans, they simply defaulted, often bankrupting their creditors.

Venice was different. Venice was the medieval equivalent of Athens, a democracy for the elites.  In 726, the Venetians rebelled against their Roman/Byzantine rulers over the Iconoclast controversy and elected the first of 117 doges before Napoleon conquered the city in 1797.  Venice became a city-state, expanding its commercial reach, and became an imperial power, eventually capturing and sacking Constantinople in 1204 during the Fourth Crusade. By the late thirteenth century, Venice was the most prosperous city in all of Europe. At the peak of its power and wealth, it had 36,000 sailors operating 3,300 ships, dominating Mediterranean commerce. Defending their empire meant wars with other Italian city-states, such as Florence and Genoa, and wars meant borrowing money.

Venice introduced the prestiti in the twelfth century.  Subscriptions were obligatory on wealthy citizens in proportion to their wealth, and the elites of Venice found forced loans preferable to outright taxation.  In 1262, Venice lost control over Constantinople, and the outstanding loans, which had been considered temporary, were consolidated into one permanent fund called the monte vecchio. This move institutionalized the prestiti as long-term loans rather than short-term borrowings. The prestiti paid a nominal interest rate of 5% on the outstanding capital, two installments of 2.5% paid per annum. After 1377, interest rates were variable, and rates were reduced to 4% in the 1400s. In 1482 a new series of prestiti, the monte nuovo, was issued based upon a new kind of tax and the interest rate was restored to 5%. Another new series, the monte novissimo, was issued in 1509 during the war with the League of Cabrai, and finally the monte sussidio was introduced in 1526....MORE