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Writings, notes and papers > Genoa and the history of finance: a series of FIRSTS? > Chapter 6
Chapter 6 - Repayment of public debt and establishment of Sinking funds
Abstract
The gradual extinction of a debt requires that the contracted sums of money be available at the agreed dates. The money can be provided by the capitalisation of a purpose-built fund. The repayment of public debt in Genoa by using sinking funds is recorded from the second half of the XIV century: it was a method used mainly by private citizens, who invested in government bonds and kept them at fixed compound interest (“moltiplici”).Definition
Fund. A stock or sum of money, especially one set apart for a particular purpose... A portion of revenue set apart as a security for specified payments (The Oxford English Dictionary, 2nd ed.)
Sinking fund. A fund formed by a revenue periodically set aside to accumulate an interest, usually for the purpose of reducing the principal of a national, municipal, or company debt. Sinking funds were established by the British Government in 1716, 1786, and 1875 for reducing the National Debt (The Oxford English Dictionary, 2nd ed.)
Moltiplico. Compound interest on deposited capital. Also: capitalisation of bank interest. In the former Bank of S.t George (Genoa) the word referred to deposits held at compound interest, that is at interest left to take interest (S. Battaglia, Grande dizionario della lingua italiana, U.T.E.T.).
Anatocism. Compound interest (The Oxford English Dictionary, 2nd ed.).Documentation
The excerpt shown below is part of a legal document dated 12th April 1371 in which a donation is made to the municipality of Genoa by Francesco Vivaldi.In nomine Domini amen. Franciscus de Vivaldis, sciens quod Commune Ianue est quampluribus creditis oneratum ... propter quod ... imposite sint quamplures compere ..., volens ipse Franciscus in hac parte quantum in eo est utilitati et commodo reipublice providere .., donavit ... Dominico de Campofregoso ... ianuensium duci ... ac suo provido Concilio, recipienti et stipulanti nomine Communis Ianue, loca nonaginta in compera magna pacis, sive libras novem millia ... modis, formis et conditionibus infrascriptis ... [id est] ordinavit quod proventus spectantes ad dicta loca et qui in futurum spectabunt habeantur et percipiantur per Protectores comperarum ... et ipsos proventus ... collocare in emptionem locorum dicte compere que scribantur super dictum Franciscum ... et sic successive singulis [annis] donec omnia [loca] dicte compere fuerint empta et acquisita ... et postquam satisfactum fuerit omnibus participibus dicte compere, tunc ... proventus assignati dicte compere ... convertantur in emptionem aliarum comperarum ... et sic fiat successive, modo et forma premissis, donec fuerit satisfactum participibus omnium comperarum Communis Ianue ... et ab inde in antea Commune Ianue de dictis locis et proventibus faciat ad suam liberam voluntatem ecc. 20
To summarise: Francesco Vivaldi, wanting to help out the municipality of Genoa which was burdened by the debt of numerous “compere”, donated 90 “luoghi” belonging to the “compera magna pacis”. The donation was made with precise conditions attached: the “luoghi” were to be managed by the managers (“Protettori”) of the “compera”, who would invest their income in the purchase of more “luoghi” of the same compera. This financial operation would be repeated over the following years, until all the other shareholders had been paid back and the funds belonging to Francesco were equal to the value of the entire “compera”. At that point the revenue would then be used to repay all other “compere”. Once that was complete the residual capital would be given to the municipality of Genoa to be used at its discretion.
Historical background
In Genoa, in the second half of the XIV century, a financial operation probably unknown elsewhere is documented: the “moltiplico” (multiplication). This featured compound capitalisation applied to a number of luoghi in the mid-long term with the aim of reaching a target capital amount. The resulting capital would then be used as the founder had wished.
The “moltiplico” could be used by private citizens and operated as follows: the owner, for example, of 10 “luoghi” could state in his will that for the 30 years following his death the revenue from his bonds must be invested in the purchase of more “luoghi”, whose revenue would, in turn, be reinvested in the same way. After 30 years the profits on the accumulated capital could be distributed year by year to his heirs and, in turn, to their descendants. Another variation of the “moltiplico” was where the capital remained invested until, with the addition of compound interest, a targeted amount was reached. That target reached, the money would then be distributed, in whole or in part, either to the heirs (for their personal use, to pay for their education, for their rent, etc.) or to charities, to hospitals, to the Church in exchange for masses, etc. The numerous variations provide a unique insight into the Genoese mentality with regard to the management of wealth.
The “moltiplico” could also have implications for local government in two ways. In the first instance when the state, upon receiving a loan in exchange for a compera, agreed with creditors the institution of a “cauda” (tail) or “redemption tail” 21. That is, they agreed to bind a portion of the “luoghi” with a “moltiplico”, until it reached the amount of the loan. At that point creditors would be reimbursed and local government could abolish the tax assigned to the “compera”. The amount of money accumulated was therefore a true sinking fund of public debt and was to be found in Genoa from the XIV century (well before the sinking funds instituted in the UK by Robert Walpole in 1717 by levying special taxes, and by William Pitt the Younger in 1786). More similar to the Genoese case was the system devised by Richard Price and published in 1771. It consisted of setting aside, when the loan was first granted, an amount equivalent to 1% of its nominal value. Compound interest on this earmarked amount would then be accumulated, until there was enough to repay the debt.
The “moltiplico” could affect public finance in a second way: when it was ordered in a will that, once a certain sum had been accumulated by compound interest, the money would be used (in total or in part) to pay for works on public utilities, to nullify a tax, to reinforce a dock, as a contribution towards the building of the Duke’s palace and so on. The oldest recorded case is that of Francesco Vivaldi, mentioned earlier. Others would imitate him and, like him, would be honoured as benefactors by the municipality of Genoa with statues and plaques in Saint George's palace.The capital left by private citizens for the public good was often an irresistible temptation for a treasury in financial difficulties. Often, therefore, local government took possession of this capital before the established term or used it for purposes different to those set out in the will. In 1603, 200 luoghi belonging to the “moltiplico” left by Battista Lomellini were used to pay for ordinary public expenses; his “moltiplico” at the time consisted of only 419 luoghi, instead of the 500 he had stipulated in his will. In 1609 a complex financial operation was used to deploy part of the “molteplici” left by Ansaldo Grimaldi and Eliano Spinola to pay for the maintenance of the fleet 22. Many other similar examples abound. However it is worthwhile remembering that, in this way, the state came into possession of a large number of “luoghi” whose revenues (paghe) were acceptable as guarantees for new loans by the Bank of St. George.
Notes:
20 A.S.G., Compere e mutui, n. 680, cc. 148-149. ^
21 The first documented cauda is dated 1350, when local government reserved one tenth of the new compera magna venetorum (300 luoghi out of a total 3000) and commits to reinvest the interest received in the purchase of more luoghi until the total value of the compera had accrued (H. Sieveking, Studio sulle finanze genovesi ... cit., p. 198). ^
22 A.S.G., Manoscritti della biblioteca, n. 11, “Legum 1608-1612“, September 13th, 1609. ^
