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Writings, notes and papers > Genoa and the history of finance: a series of FIRSTS? > Chapter 10
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Chapter 10 - The protection of financial capital and the "very wise" laws of Genoa
Abstract
Right from its beginning the monetary market has been characterised by two linked, secular phenomena: devaluation of the unit of account and price inflation. These have implications for the settlement of term bonds: the loss of value in currency between the time of entering into a debt and the time of its repayment can fall: 1) on the debtor, if the principle of equality between the purchasing power of the money loaned and that of the money refunded is applied; or 2) on the creditor, if the nominalist principle of numeric equality between the units of account given and those received is applied. The problem was well known in Genoa and after the first measures devised by creditors to transfer the loss to the debtor, a well constructed act of law was passed to deal with this matter.Definition
Devaluation. The reduction of the official value of a currency in terms of gold or of another currency (The Oxford English Dictionary, 2nd ed.).
Inflation. An undue increase in the quantity of money in relation to the goods available for purchase; (in lay use) an inordinate rise in prices (The Oxford English Dictionary, 2nd ed.)..Documentation (1)
Among the deeds drawn up by the lawyer Guglielmo Cassinese at the end of the XII century are many with a common thread involving the manipulation of contracts. The oldest dates back to 8th March 1191 and reads as follows: 30Testes Rufinus Belser, Obertus de Viver. Sub volta Fornariorum die VIII martii. Confitetur Bernardus de Vintimillia se daturum Iacomo Damiano lib. XXI bonorum previdixium in pro xima feria de Bar, et si previdixes forent peiorati de lege vel de peso vel abatuti, dare promittit pro sol. XLV marcam argenti boni ut ascendet de toto debito et expensas et dampnum et mutuum quod faceret. Et inde quatuor torsellos de cordoanis et reliqua bona sua ei pignori obligat, et quos confitetur ducere Girardus de Zarroli ad feriam, et habere a Iacomo, et se daturum Iacomo in feria proxima de Bar.
This legal document is a contract of exchange: Bernardo has received a loan from Giacomo and with it he has apparently bought a lot of merchandises; he intends to resell them at the next fair in Champagne and there to repay him “lire” 21 in that currency. Since, in the meantime, the state could devalue the monetary unity of account with one of its classic moves (reducing the fineness or weight of metallic currency, or increasing its nominal value), the creditor protects himself with a clause wherein the debtor must repay a sum with the same quantity of silver contained in the lire used in Champagne when the contract is made.
Documentation (2)
On 19th November 1637 and 1st February 1638 the Genoese government passed a law designed to regulate the use of money in payments. To summarise, it went as follows:
a) in contracts and wills where a loan was set out in a given effective currency or in a specified “imaginary” currency (such as the “lire di numerato” used by the House of St George) or in current “imaginary” currency (for example “lire”), repayment would have to be made in currency which had the same purchasing power as the amount of the original loan or that detailed in the will;
b) the same applied to the “censi”, unless the creditor had accepted the nominal amount for at least 10 years without protest;
c) rents, salaries and periodic loans which had not been agreed on in a specified currency, would be repaid in Genoese “lire” in line with their value on the date of maturity.
To facilitate the calculation of the purchasing power of currency in cases where a loan had to be revalued, the law suggested the use of the silver scudo (at equal weight and fineness) as a benchmark in calculating any difference in value between the start date of the loan and the date of maturity. In this way, the law ended, “there will be equality and justice applied to all contracts”. 31Historical background
Between the reform of Charlemagne (780-790 AD) and today, monetary systems have undergone profound transformation. Until the beginning of modern times, gold and silver coins were the only legal tender and the purchasing power of the “lira” (i.e. the unit of account) was the same of its equivalence in precious metals.
The first appearances of bank notes and of government paper money (in Naples in the late XVI century, in Genoa at the beginning of the XVII century, in Stockholm and in England in the second half of the XVII century, in France and elsewhere in XVIII century), their proliferation and the huge diffusion of cheques during the XIX century did not change the picture because normally they were convertible on sight into hard currency.
World War I (1914-18), on the contrary, deeply upsetted the monetary systems of the time: the enormous expenditure on the conflict made treasuries use hard currency for overseas payments and use token money (bank notes or state issued bills) for domestic payments. The return to peace did not improve the situation, also because attempts to come back to gold were frustrated by the great depression of 1929 and, thereafter, by World War II. The role of gold was virtually reduced to transactions between central banks and hard currency was substituted almost everywhere with non-convertible fiduciary bills.
In the thousand or so years in which these changes took place, the purchasing power of hard currency continued to deteriorate in comparison with other economic wealth. This long term, secular phenomenon manifested itself in two ways: the progressive devaluation of hard currency and a corresponding increase in the prices of goods and services. For Carolingian currency, from which the European monetary systems were derived, the beginning of the debasement of hard currency dates back to the downfall of the empire and was produced, it would seem, by the drastic and fraudulent removal of silver by the various mints. Later on this issue became less important, but the diffusion of the monetary economy brought into play other disturbing factors from the market; the states then had no choice but to succumb, reducing the metallic equivalence of the respective unity of account.
Another consequence of the devaluation of currency was the conflict of interest which arose between creditors and debtors in financial transactions, when there was an immediate payment of capital against a repayment in the mid-long term. This conflict came about because creditors, having delivered a capital with a certain purchasing power at the time of loan agreement, wished to recoup it in its entirety. The debtors, on the other hand, tended to repay, at the end of the term, the same nominal amount received in the past but, because of devaluation in the meantime, the loan capital now had a reduced purchasing power, effectively making them a profit from the difference.
It is difficult to say if, especially at the beginning, traders were aware of the financial effects of devaluation and knew how to profit from it; documentary evidences of this are very limited. To my knowledge, the oldest one is to be found in document 1 above and in other similar acts drawn up in Genoa in the following months. Obviously, the survival of the aforementioned deeds does not prove conclusively that the Genoese were the first to protect themselves from the effects of monetary devaluation; they provide the only evidence we have, but other, perhaps older documents could have been written elsewhere and have been lost. Their existence does demonstrate, however, the awareness which Genoese traders had of monetary phenomena and the method they chose to remedy the possible devaluation (about which they had heard rumours): anchoring the repayment value in the fair to the equivalence in silver of the unit of account used there when the loan had been made.
In the private sector the conflicts of interest between creditors and debtors inevitably ended up in the courts where, having been the source of conflicting judgements, the matter ended up in the hands of the legislators. Gian Rinaldo Carli, one of the greatest experts on currency in the XVIII century Italy, refers to the regulations in some Italian and overseas states to limit the controversies which were brought about by frequent currency fluctuation; we can refer to his work for examples of the solutions adopted. 32
Gian Rinaldo Carli recounts for example the order of Filippo il Bello in 1306 to repay long-term debts in currency equivalent to that used when the loan contract had been agreed, and to calculate it on the value of the silver mark, i.e. with the same criteria applied a century earlier by the Genoese 33. The principle of equality between the purchasing power of loans and repayments can be found also in laws applied in Scotland, Castilla and, with the exception of contracts where a particular currency was stipulated (such as gold florins, gold coins, silver scudi, etc) in Milan (1406), in Turin (1632), etc. But legislation was neither always consistent nor unambiguous; in Milan the regulations from Francesco Sforza (1465) and from the chamber of justice (1539) completely upset the previous ruling in favour of the nominalist principle and the same happened again in Florence in 1552.
Of all the cases examined, the one that responded best to the common law is that of Genoa for which Carli quoted the text of the law of 1637-38 in its entirety (summarised in document 2), heaping praises on it: “If ever there was a city which understood and subtly managed such an issue, it was certainly Genoa and it is therefore necessary to read attentively and observe the very wise laws of Genoa formulated on behalf of the creditors” 34. His praises were divided equally between the organisation of the content, the description of the problem and the choice of a valuation index (the price of coined silver), which for the first time in history had to be applied automatically and permanently to financial transactions. Also the inclusion of the law in the civil statutes of the republic shows its long lasting importance and its consistency with the philosophy of the Genoese governors who, being capitalists and bankers, obviously supported the reasons of the creditor in all financial matters.
As previously described, in the course of the XVIII century and more so in the XIX century the issuing of paper money did not substantially alter the situation because state issued notes, bank notes and private cheques were almost always convertible into gold and silver hard currency. In the meanwhile ongoing developments had sewn the seeds of future, more traumatic changes; for example the more and more frequent replacement of metallic money by its substitutes had the effect, in some way, of obscuring the intrinsic value of the unit of account, favouring its legal value. The same phenomena of non convertibility, albeit sporadic and of brief duration, brought to the attention of the states the limitless possibilities of manipulation afforded by paper money (you only need to think about the French "assignat") and fed public opinion with the idea that the survival of the state could well justify monetary changes.
These factors, fuelled in the XIX century by the rising tide of nationalism and in the 20th century by the growing role of the state, emerged with all their power for creating upset during the two world wars, when public debt had reached such heights as to affect all economic life. In the new stage of history it would become necessary to find other solutions to the conflict of interest between creditors and debtors, overturning the criteria prevalent in the past and limiting the use of protective clauses (references to gold, to goods, to valuation indices, etc) 35.Until the XIX century the trend in searching for equality between purchasing power of the amount loaned and that repaid responded to the need to defend still modest capitalistic accumulation. In the XX century, however, the state – undoubtedly the most indebted party in any country – gambled well by playing its “social role” card and applying the nominalist principle, which allowed it to rid itself of public debt burdens, leaving its creditors to get a raw deal due to the rise in prices. Wealth was growing; private savings were therefore to be sacrificed on the altar of new social ideals.
Notes:
30 Guglielmo Cassinese (1190-1192), a cura di M.W. Hall - H.C. Krueger - R.L. Reynolds, Genova, 1938 (Notai liguri del sec. XII, II), nn. 275, 423, 540, etc. For a general indication of such deeds dated between 8 March 1191 and 6 March 1192, and for similar contracts by other notaries between 16 June 1193 and 26 April 1206 see M. Chiaudano, "La moneta di Genova nel secolo XII" (“Money in Genoa in the XII century”), in Studi in onore di Armando Sapori, vol. I, Milano, 1957, page 210. ^
31 Statutorum civilium serenissimae reipublicae Genuensis. Libri sex, Genuae, apud Petrum Ioannem Calenzanum, MDCLXIII. ^
32 Delle opere del signor commendatore don Gianrinaldo conte Carli ...., volume VII, Milano, MDCCLXXXV, pages 242-265. ^
33 Filippo il Bello policies, in fact, are full of monetary falsifications, to the point where they earned the disapproval of, Bonifacio VIII; but the point of main interest here is to remember the importance he gave to the principle of the value of hard currency. ^
34 Delle opere del signor commendatore don Gianrinaldo conte Carli ..., volume VII cit., pages. 254-261. ^
35 Sugli indirizzi giurisprudenziali in materia durante i secc. XIX-XX v. principalmente B. Inzitari, G. Vicentini e A. Di Amato, Moneta e valuta, Padova, dott. A. Dilani, 1983 (Trattato di diritto commerciale e di diritto pubblico dell’economia, volume sesto) ed in particolare, di B. Inzitari, i capitoli terzo (“Il principio nominalistico”) e sesto (“Clausole monetarie”). ^
