Giuseppe Felloni

Writings, notes and papers > Genoa and the history of finance: a series of FIRSTS? > Chapter 1

 

Genoa and the history of finance: a series of FIRSTS?

Chapter 1: Public Debt

Abstract
In ancient times the power of the state was based upon treasures accumulated during prosperous, peaceful times by its rulers or, more often, upon the spoils of war. Nowadays it is nearly entirely based upon public debt, that is, money lent to the governing authority by private citizens. The present day system is the result of a long evolution which began in the Middle Ages and developed within the Italian city-states; the oldest records of public debt date back to the mid. XII century and relate to the city of Genoa: loans made by private citizens to the state and granted with a public revenue as security (“compere”). This was the same founding principle on which public debt of the big European monarchies was based from the XVI century onwards.

Definition
Public debt. A debt owed by a sovereign state to private individuals who have advanced money to it for the public needs; especially that main part of the public debt which has been converted into a fund or stock of which the government no longer seeks to pay off the principal but to provide the annual interest; hence called funded debt, as opposed to the floating debt, which includes the ever-varying amounts due by the government and repayable on demand or by a certain time (The Oxford English Dictionary, 2nd ed.).
Compera.Historically the first public loans in Genoa were called "compere" (purchases) given that the municipality  awarded moneylenders a part of the tax profits, so that the loans became a sort of purchase of public income. The loans were often named after the merchandise charged with the tax that had been sold to the moneylenders (“compera” of salt, of wine, etc.) or after the wars that made the loans themselves necessary (“compera” of Corsica, of Venice, etc). The creditors’ names were written in a ledger, the so called "cartulario delle compere" (Vocabolario della lingua italiana, Istituto della Enciclopedia Italiana Treccani).

Documentation
The following is an abstract from old official documents of the municipality of Genoa, dated January 1150: 2

Nos consules comunis Ianue Capharus, Obertus Spinula, ... vobis Guillelmo Vento, Oberto Turri, ... et vestris consortibus nominative vendimus ... ab ista proxima Purificacione sancte Marie usque ad annos viginti novem expletos usufructum de banchis comunis Ianue; precio accepimus a vobis consortibus libras quatuor centum denariorum ... Preterea nos predicti emptores, gratuita et bona voluntate et amore Comunis Ianue, ... volumus ut si Comune Ianue infra predictos viginti novem annos dederit no-bis libras quingentas ... vendemus Comuni Ianue pro precio de suprascriptis libris D usufructum quod nobis de predictis banchis deinde pervenire deberet.

A free translation reads: “We, Caffaro, Oberto Spinola etc., consuls of the municipality of Genoa, sell to you, Guglielmo Vento, Oberto Torre and to your consorts the income from the municipal stalls for 29 years, starting from the 2nd of February, for the price of 400 lire.  And we, the purchasers, out of goodwill and love for the city, agree that upon payment of 500 lire the municipality has the right to repossess the public stalls even before the end of the agreed 29 years.”
To put it more simply, the municipality owned some stalls in the public marketplace, which it rented out to money exchangers. Needing 400 lire, the municipality ceded the rental income to private investors for 29 years upon the expiration of which, having returned them the original amount of the loan, it reacquired possession of the stalls. If the municipality wished to reacquire possession before the 29 years were up, however, it would have to pay the creditors 500 lire (capital repayment plus a penalty of 100 lire for loss of income up to the date contracted to in the original agreement).

Historical background
Usually the granting of a loan comes with a series of conditions, the most important of which is the profit required by the moneylender. The problem is that for a long time canon law opposed such profit and condemned it as unlawful.
The Church labelled any request for interest  (no matter how small) as usury, forbidden by the Holy Scriptures and against the traditions of the founding fathers of the Church. Backed by theological arguments based on fraternity and natural morality, the ban remained in force until the XII century, and had the solid support of the secular authority.
This clashed with the financial needs of the municipality of Genoa, a young and forceful entity oriented towards the acquisition of new trades and new territories for the benefit of its citizens and, therefore, in need of capital to conquer new lands and gain control of the seas. Since loans were forbidden, it became necessary to find an alternative legal procedure to avoid accusations of usury.
Genoa devised then a new, medium-long term loan legislation inspired by a contract which had existed for centuries: the “censo dominicale o riservativo“; by which rich landowners, in order to yield income from wasted fields, gave them to farmers without land for lengthy periods of time (even in perpetuity), in exchange for a pre-arranged fee.
In the later version of the "censo consignativo" (a kind of rent charge), the farm-worker received a sum of money from the creditor and contracted to give him yearly, until reimbursement, an agreed sum derived from cultivation of a specific plot of land. If the sum was not delivered or the loan was not repaid on time, then the creditor had the right to repossess the land. A similar type of contract still exists today in Italian civil law and is called “costituzione di rendita”. This “contratto di censo was transferred from the countryside to Genoa city and later underwent further extraordinary developments.
According to surviving documents, the use of the “contratto di censo” in Genoese public finance started in the fifth decade of the XII century with a contract selling municipal revenue in exchange for a sum of money. The early contracts contained features which reflected their rural origins (almost always of long duration, lasting up to 29 years); others contained features completely incongruous with their rural roots or, quite simply, new (for example the participation of several lenders) and in others no reimbursement was envisaged, meaning that it was simply contract work. 3
But already in two contracts dated 1150 the municipality was given the right to repossess its income stream at a date earlier than that in the agreement by paying a higher sum of money than the sale price. In other words, a loan paid back with interest. 4
Soon enough these financial operations acquired a characteristic configuration that remained unchanged over time. The two parties to the contract were the municipality, which received a loan amount for a determined length of time and one or more lenders, who in exchange for their loan obtained the right to cash revenues from a tax (either one pre-existing or a tax set up specifically for the purpose) which would provide a yield proportional to the loan capital.
In practice, the ceded tax revenue represented the interest on the loan and also acted as a lien for reimbursement since, if the agreed deadline for repayment was not met by the state, then the creditors would keep on benefiting from the revenue stream until the state paid them back.
The revenue received by the creditor could vary from year to year, depending on the economic situation, sometimes increasing but more often than not diminishing with respect to the sum initially envisaged. This brought an uncertainty to the relationship between capital and interest and stopped creditors making an automatic illicit profit. Hence the use of the term compera to define the purchase of a tax income of variable amount in exchange for a fixed sum of money (the corresponding capital). 5
To avoid confusion each “compera” was named after either the sum of money involved (“compera” of 20,000 lire), the purpose of the loan (“compera” for maritime armaments), the tax on which it was based (“compera” of 1% on insurances), the name of a saint (compera of Saint Peter) and so on.
Each “compera” had its own legal personality, surviving over time even if its creditors were to sell their shares to a third party. In most cases it managed directly the revenues on which it had been funded and was administered in turn by “trustees” elected from amongst the lenders themselves.
Outside Genoa, for a long time the “contratto di censo" did not have a clearly defined format and was subject to much abuse, to the point where the Church had to intervene. A series of papal bills were issued between 1423 and 1569, when Pope Pio V defined the contract’s final legal form.

Two of the most interesting aspects of this regulation were:
1) That it made tax income equivalent to income from property (the state being conceived as a real estate), which meant that the Genoese “compere” were now identified as a “censo”.
2) That if the repayment date was not specified in the terms of the contract, only the debtor could choose, at its discretion, when to repay the capital.
The process of gradual regulation over time was of great technical, economic and legal importance. The nature of the contract, rooted in the canon law, had the effect of excluding it from the more dynamic sectors of economic life whilst spreading in others: in agriculture (where, from the late XVI century, use of the contratto di censo multiplied rapidly) and in public finance (where the certainty and legality of the operation meant that both the interests of the moneylenders and of the borrowing state were met).
Private citizens found the public  “contratto di censo” a convenient investment vehicle because it gave a good return on their capital in a stable currency and, if necessary, could easily be reconverted into cash. The state, thanks to the interpretation by canon law that fiscal revenue was equivalent to income from property, was able to seek voluntary loans from citizens in the legal format of a “contratto di censo”, based on public revenues created expressly for the occasion, and repayable on its own terms. The only two limitations were the resourcefulness of the treasury and the subjection of taxpayers. 6
It is not surprising therefore that even before papal regulation and principally thereafter states adopted the use of the contratto di censo, which, depending on the region, were called by different names (compere, monti, depositi, rentes, annuities, etc…) but which all retained the characteristic of being the purchase of public revenues.

In the course of time changes occurred to the terms and conditions of the contract, for example the introduction of a fixed-rate interest to shelter the buyer from fluctuations in the tax income; this variation, particularly cumbersome for the treasury, was that applied in 1694 for the loan of £1,200,000 stg to the English Crown, from which the Bank of England was born 7. However, also in this case, the contract still remained a purchase of public revenue and the debtor always retained the right to request settlement of the loan. Whatever their clauses, the growth of these public loans or “censi” led to the creation of new taxes by the treasury, so that the income from them could be sold.  Hence public debt, although not a new phenomenon, grew enormously along with an increase in indirect taxation on which the “censi” were, in the main, based.

Notes:

2 I Libri Iurium della Repubblica di Genova, Vol. I/1 a cura di Antonella Rovere, Genova 1992, n. 125, pp. 190-192. ^

3 Among the earliest contracts: the one dated January 1141 by which the municipality cedes the management of the mint for 14 months to a consortium of 16 citizens in exchange for 1700 lire and a share of the profits; the contract dated April 1144 in which it contracts out to 5 individuals   the linen stand for 25 years in return for 102 lire; the contract dated February 1149 by which almost all customs income is sold for 15 years to a group of 17 buyers for the sum of 1301 lire (Ibidem, docc. nn. 36, 134 and 113). ^

4 Contract dated January 1150: the municipality of Genoa cedes various income for 29 years to a company of 11 buyers in exchange for 1200 lire and keeps the right to reposess the income streams before the agreed term by paying 1500 lire. Another contract bearing the same date: the municipality of Genoa sells for 29 years to an association of 9 buyers the income derived from its money exchange stalls in the public market. The municipality retains the right to redeem them before the agreed term by paying 500 lire in currency and pepper (Ibidem, docc. nn.122 e 125). ^

5 Let’s not confuse the compera with the sale to private citizens of a certain public income for a determined length of time (usually 1-5 years) in exchange for a sum of money. This deal, called “appalto”, guaranteed a fixed income to the state (the agreed price) and burdened the private citizen with the risk of a floating income. ^

6 Current opinion is that the first two “contratto di censo” of which there is evidence were those created in 1526 by pope Clemente VII. Therefore the “censo” based on fiscal revenues were already permitted by the Church before pope Pio V gave them official clearance. ^

7 "An Act for granting to theire Majesties severall Rates and Duties upon Tonnage of Shipps and Vessells and upon Beere Ale and other Liquors for secureing certaine Recompenses and Advantages in the said Act mentioned to such Persons as shall voluntary advance the summe of Fifteene hundred thousand pounds towards carrying on the Warr against France" (5 & 6 William and Mary, chapter XX, pp. 483-485). ^