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Writings, notes and papers > Genoa and the history of finance: a series of FIRSTS? > Chapter 5
Chapter 5 - Discount on state Bond coupons
Abstract
Discount is one of the most powerful tools for stimulation of the economy because it makes cash available in advance of an as yet unmatured credit and thereby increases the amount of capital immediately available. The oldest record of the systematic and general use of discount is to be found in Genoa in the mid XV century. It consisted of the discount on the earnings (or “paghe”) of public debt bonds (the “luoghi” of St. George).Definition
Paga. Instalment payment, either of interest, of repayment of capital or of tax (Vocabolario della lingua italiana, Istituto della Enciclopedia Italiana Treccani).
The variable income allocated each year to the luoghi of the Genoese compere, in proportion to the tax revenues.
Discount. A deduction (usually at a certain rate per cent.) made for payment before it is due, or for prompt payment, of a bill or account; a deduction for cash payment from the price of an article usually sold on credit; any deduction or abatement from the nominal value or price (The Oxford English Dictionary, 2nd ed.).Documentation (1)
1474 die tertia iunii. Precia locorum et pagarum pro ut capi debent: 18
Page de 1473 pro libra
Soldi
18
(=90%)
Page floreni de 1474
ss.
17
(=85%)
Page floreni de 1475
ss.
16
(=80%)
Page floreni de 1476 et 1477
ss.
14
(=70’%)
Page floreni de 1481 et 1482
ss.
11
(=55%)
Page floreni de 1483
ss.
10
(=50%)
Page floreni de 1484
ss.
9
(=45%)
Page floreni de 1485
ss.
8
(=40%)
Page floreni de 1486
ss.
7
(=35%)
Page floreni de 1487
ss.
6
(=30%)
As with the capital of the “luoghi”, the yearly income or “paghe” which they produced was used as an exchange item, a form of guarantee and a method of payment. Being a non matured credit, the market value of “paghe” was lower than their nominal value. The amount of discount depended on both the profit established for the year of issue and the future expiry date, when the “paghe” would be worth their nominal value once again. In certain cases, as with the aforementioned “page floreni”, discount was applied to a credit, whose nominal value was not predetermined but would be declared in the future. Also in cases like this the Bank of St. George established tariffs such as the ones detailed above for the “page floreni”, on the basis of which the Bank could purchase the “paghe” before their due date at a fraction expressed in “soldi” of every lira of nominal value. A “paga” valued at 16 soldi, for example, was purchased at only 80% of its nominal value, therefore resulting in a 20% discount. In the above table, next to the discounted value calculated in soldi, there appeared in brackets the easier to understand value expressed as a percentage of the nominal value.
Documentation (2)
In the 1649 ledger of the “Officium pagarum”, recording the purchases and sales of “paghe” over several years, we find the three following entries registered on August 18th by double entry: 19
1649 die 18 augusti
-
Cartularium pagarum 1647 pro Maria filia q. Garbarini et uxor q. Iohannis Baptiste Calvi, libras 307.13.08 pro valuta totidem pagarum 1649 scribendarum in credito dicte Marie de quibus etc. et restum pro numerato solvendo dicte Marie ut supra, valent
₤
282.13.06
-
Maria filia q. Cesaris Garbarini et uxor q. Iohannis Baptiste Calvi pro cartulario pagarum 1649, libras 307.13.08 valuta ad ss. 17.04.1/2 pro dicto cartulario pagarum 1649, valent
₤
267.05.10
-
Item pro Iacobo Spinula thesaurario,
libras 15.07.08, valent₤
15.07.08
To summarise, Maria Garbarini sold £ 307.13.08 worth of “paghe” issued in the year 1647 and received £ 282.13.06 for it, 91.9% of their nominal value. She then purchased with this sum a quantity of “paghe” issued in 1649 (which, being further from the due date, were priced at only 86.9% of their nominal value) and cashed in the difference of £15.07.08.
Historical background
After 1450 the state’s financial needs grew. The Bank of St. George now faced the problem of reconciling the opposing and incompatible interests of the municipality (which needed considerable portions of the fiscal revenue) and of the “luogatari” (the owners of “luoghi”), who were entitled to receive the whole amount of such fiscal revenue). In the end it was the creditors who slowly but surely lost the battle, being offered alternatives to reduce the losses due to the missing revenue stream. Taxes were sold in the first months of year X and in May-June, by adding the prices obtained to the sales and deducting the forecast management expenses, the Bank of St. George calculated the expected revenue or “paga” for the year X for each “luogo” and the amount due to each individual shareholder (“luogatario”). These amounts were recorded in double entry ledgers called “cartulari pagarum”. At this point the “paga” should have been paid off in instalments within one year, but the necessary money just was not available, having been already lent to the state. The Bank of St. George was then forced to delay instalment payments, the delay increasing over the years from a few months (at the end of the 1440s) to 9 years and more in the mid-XVI century.
However, the credits accumulated by the shareholders of the “luoghi” were not frozen until repayment was made in full. Had this occurred, it would have caused a drastic reduction in liquidity, affecting thousands of people who had lent money to the state and amongst them were churches, convents, or private citizens who had invested their savings in the “compere”.
To get out of the bind in which it found itself, the Bank of St. George required buyers of taxes for the year X to pay the asking price with “paghe” of the same year. Thus a market for “paghe” came into being and credits started being sold for cash at less than their nominal value. The “paghe” were put on the market by the owners of the ‘luoghi’ and purchased by tax's buyers, by newly appointed government officials, by short term investors, speculators, etc
This market for discount, born out of necessity, was yet another milestone in financial history; discount, previously used only in private transactions, now became public practice and on such a large scale as to raise doubts on the grounds of morality. Pope Callistus III settled the matter in 1456: the sale of the “paghe” at a cash price lower than the nominal value did not contravene the Church’s rules. Pope Sistus IV later (in 1479) confirmed the same position in more explicit terms.
The system of “paghe” introduced in 1446 would continue even after 1531 (when the banks resumed their activities) and would be abolished in 1765, when income would become immediately payable, though with some major changes:1) From 1579 payments could not be extended for more than five years and remained the same to the end of the period.
2) In 1631, in an attempt to keep down the price of discounts on the open market, the House of St. George opened an office, which held a monopoly on the purchase and sale of “paghe”. However, unable to contain the speculation, the office was shut in 1662.
3) The House of St. George often lent a helping hand to public and religious institutions which owned “luoghi” but which were not cash rich. The Bank loaned sums of money equivalent to the nominal value of the income, taking the burden of discount upon itself.Notes:
18 A.S.G., Archivio di San Giorgio, series”Rggdvs02”, n. 92 ^
19 A.S.G., Archivio San Giorgio, pand. 17, n. 7061. ^
