Pisan Promises:
Te Growth of Obligations
Within the surface of the feeting river Te wrinkled image of the city lay, Immovably unquiet, and forever It trembles, but it never fades away …
Percy Bysshe Shelley
‘Evening: Ponte al Mare, Pisa’ (1824)
The story of bank money begins in Pisa in the twelfth century. By studying the history of money and fnance in this ancient maritime republic, by examining in detail the ledgers and transactions of its pioneering banks and corporations, and by attempting to understand the complex trades between individuals and institutions in this great city state, we get to witness the development of many of the fundamental fnancial instruments of modern banking and can also perhaps begin to understand the profound relationship between money, states and promises.
Coin Trouble
Known today for its leaning tower – the bell-tower, the campanile, of the old cathedral, Cattedrale Metropolitana Primaziale di Santa Maria Assunta – and as the birthplace of both Galileo Galilei, the father of modern science, and Leonardo da Pisa, known as Fibonacci, who introduced modern arithmetic to the West, the ancient city-state of Pisa was one of the great maritime republics. Te chief harbour of Tuscany, Pisa had acquired the island colonies of Elba, Corsica, Sardinia, and Menorca, and had set up entrepôts on the coasts of France, Spain, North Africa, and the Levant, with vessels moving their precious wares of spices, silks and dyes among them. Pisa was thus at the very centre of medieval Europe. It was a powerhouse.
Coalition governments ruled the city. Merchants, ship owners, and manufacturers, along with artisans and workers, were among those involved in government, with certain groups rising to greater prominence over others at various times. Crucially, whoever led the coalition had control of the Mint, which was used to coin the heavy silver pieces needed for the international trade that kept Pisa afoat, as well as providing the small change needed for everyday use. Te silver mined in the colonies of Elba and Sardinia fowed into Pisa, and full-weight silver coins fowed out in return, coins that are still being found in troves all over the Mediterranean today.
But Pisa had a problem: the Mint could not supply enough coins to meet the demand of its citizens, the needs of its merchants and its vast ongoing sea trade.
Tere were a number of reasons why the Mint couldn’t keep up with demand. First, the peculiar practice and principles of minting – the process of manufacturing the coins – determined the money supply, to the disadvantage of both the citizens and the Mint. Te Mint would purchase bullion, precious metal, gold and silver, from private citizens at a fxed price, and would pay for that bullion with the very coins, minus a fee, they had minted from the bullion. Te supply of coins thus depended on the metal available, and the metal available was determined by the supply of coins; the less precious metal available to the Mint, the fewer full-weight silver and gold coins that were created and the greater the demand for them. It was a vicious circle. Te need for coins and the price ofered for bullion drove citizens to sell their precious metal to the Mint, but if the Mint ofered too low a price, citizens simply sold their bullion and the local coins abroad. It was a precarious system: there was no secure guarantee of supply.
Te second reason the Mint was unable to meet demand was that the actual act of minting coins was a highly regulated activity. A closed and secretive guild, made up of skilled artisans known as coiners, manually produced the coins using hammer and chisel. More like a caste than a guild, the ranks of the coiners were closed, with membership handed down from father to son. Te coiners’ guild was independent and powerful, maintaining strict rules and procedures governing every aspect of how the coiners lived and worked, which drastically slowed coin production.
Political and social confict also inevitably contributed to problems of production. Tough the merchant class generally held sway in the governance of the city, their role could be fraught and fragile. When
a new coalition came into power, the leaders would tailor the coinage to meet the demands of their own interests and the interests of their supporters and constituencies. Labourers, artisans, retail businesses and farmers tended to prefer coins of small denomination, containing little precious metal, which provided them with a cheap means of payment suitable for retail trade and workers’ wages. Merchants, big businesses and manufacturers preferred the heavy silver and gold coins that were better suited for international and wholesale trade. Debates and disputes about which coins to mint, how many and by whom, were frequent – and sometimes bloody.
It was this crisis of coins in Pisa that paved the way for the development of banking as we know it today.
But frst – before the complex systems of banking could fully emerge – a number of other factors had to be in place. And they just happened to be in place in Pisa.
Fibonacci and the New Mathematics
As one of the great maritime republics, alongside Venice, Genoa and Amalf, Pisa had become a centre not just for the trade of goods in exchange for coins, but also for the trade of ideas. Tis was true for one man in particular, Leonardo da Pisa, better known by his nickname, Fibonacci.
Fibonacci’s story has been told many times before. The son of a Pisan o f cial based in the North African colony of Bugia, Fibonacci had spent time travelling and trading in the southern Mediterranean, which is where he learned about Leonardo da Pisa. Fibonacci.
Fibonacci’s Liber Abaci. Dating from 1290. The oldest copy known, now at the Biblioteca Riccardiana in Florence.
Arabic and Indian mathematics. In his Liber Abaci, Te Book of Calculation, published in 1202 , Fibonacci outlined the advantages of the Arabic numeral system and Indian mathematics over the Roman system, introducing ideas such as zephirum (zero) and algorithms. His ideas quickly caught on, locally and far beyond. In recognition of his brilliance and infuence, in 1241, the city of Pisa began paying Fibonacci the princely sum of 20 lire per annum. He was a local hero.
It is important to note that Fibonacci’s was no mere theoretical enterprise. He was interested in showing how the new maths could help business. Liber Abaci was a book made for merchants and bankers: it is a guide to making money from money. Indeed, as Will Goetzmann of the Yale School of Management has argued, Liber Abaci might be understood as a kind of textbook for aspiring fnanciers. It shows how
A Liber Abaci from the Republic of Venice. One of the most successful manuals for merchants, written by Girolamo Tagliente, was reprinted 20 times. This copy is from the early sixteenth century.
to price money accurately, on a daily, monthly and annual basis, using simple and compound interest. It also presents a simple method for calculating the present value of money accruing in the future. And it explains how to calculate the purchasing power of diferent currencies in diferent jurisdictions.
Fibonacci’s ideas became the new standard not only for understanding numbers but also for understanding the practice of commerce; they became a method. Cities and guilds – including those in Pisa – set up schools of abaci (arithmetic and accounting), based on Fibonacci’s principles, to train apprentices for merchant houses. Students would learn, among other skills, how to keep track of debts using appropriate entries on a frm’s ledgers. A typical manual of practical instruction for merchants and bankers, published in 1292, for example, now held at the Biblioteca Riccardiana in Florence, is pure Fibonacci.
A Liber Abaci from the Republic of Genoa (1512). The manual teaches arithmetic and bookkeeping with words, numbers and images from the daily life of merchants: the counting house and the merchant’s ship.
So, it was the emergence of new knowledge and institutions, and the need for a new kind of money that made the Republic of Pisa the perfect place for the development of banking.Tere was also the small matter of the Catholic Church.
Te Leaning Tower and the Power of Debt
Te best illustration of how banking practices began to emerge in Pisa with the tacit blessing of the Church can be found in the history of the city’s most famous landmark: the leaning tower.
Over time, Pisa and the people of the city-state had become wealthy. A small, modest church in the centre of Pisa had served as its cathedral for centuries, but by the twelfth century the citizens were keen to show of their wealth. Tey wanted to build a grand temple close to the sea, so that any ships docking or passing through would be awed by the city and its church’s magnifcence. Te local church and the republican government handled the construction, setting up a corporation – the Cathedral Foundry – to complete the job. Private citizens endowed the foundry with coins, agricultural land and buildings.
But the project was costly and income from the endowment inevitably fell short of the project’s needs. Given the Catholic Church’s traditional prohibition on usury, which restricted the practice of lending and borrowing for business purposes, there was a problem. What to do?
Te corporation started doing business. Its ledger for the year 1153 alone lists dozens of real estate deals. Pisa’s cathedral and its leaning tower owe their very existence to these extraordinary deals.
If we take just a couple of the corporation’s transactions as examples, we can see the elegance and brilliance of the Pisan model.
Te ledgers show that in 1153, the Cathedral Foundry sold a tract of land to someone called Lanfranco, a local squire, for 1,240 shillings. In another trade, in the same year, and for the same price, the foundry bought an estate from the local bishop, Averardo.
A few months later, it bought back the tract of land from Lanfranco for exactly the same price – 1,240 shillings. At the same time, in another trade, the Foundry sold the estate back to bishop Averardo again for 1,240 shillings.
A few other transactions show a similar curious pattern: the foundry buys and sells back, and sells and buys back, with nobody seeming to make money in any of these transactions. So, what on earth was the point of them?
Te answer is that although legally the trades were sales, fnancially they functioned as loans. Te sequence of sale and buyback delivered all the economic rewards of borrowing and lending at interest, because during the entire period between sale and buyback, the properties were being put to productive use. Tus, the foundry efectively ‘borrowed’ from Lanfranco by selling him the land and returning the capital when it bought the property back from him. And it was efectively ‘lending’ to Averardo by frst buying the estate and then selling it back to him.
Te true but unstated business of the Cathedral Foundry was, therefore, unregulated lending, or what is known today as shadow banking. Te Foundry, Lanfranco and Averardo all beneftted from this arrangement, in the same way that borrowers and lenders beneft today. Te purchasers enjoyed the fruits of the properties while they owned them – Lanfranco receiving the products of the land and the Foundry the yield from the estate. No-one was violating the Church’s prohibitions against usury. Everyone was a winner.
Tis system of shadow banking worked because the risks of lending to the Foundry were so low. Te corporation was half-church, half-state, making it a pretty safe bet for the likes of Lanfranco and Averardo.
Similar trades in the Foundry’s ledgers are all basically lending in disguise. Since the church leadership in Rome had banned lending at interest, this useful loophole allowed everyone involved to avoid the wrath of Rome.
Te benefts of the corporation’s lending were not at all insignifcant: with all the money and benefts from the transactions, the cathedral
was soon fnished. And with the cathedral fnished, work soon began on the construction of the bell tower and the baptistry, which remains today the largest in Italy, and the whole of what is now Pisa’s Cathedral Square, the Piazza del Duomo. Te citizens of Pisa viewed this extraordinary feat as nothing short of astounding, eventually renaming the square Piazza dei Miracoli, the Square of Miracles.
Te real miracle – as so often – was not so much spiritual as fnancial.
Te Beginning of Corporate Banking
Yet despite these miraculous innovations and developments, by the beginning of the fourteenth century, Pisa’s fortunes were declining. Te city-state lost its overseas colonies to rival Genoa and its inland expansion was checked by neighbouring Florence. Long-distance trade dwindled and the infow of precious metals slowed. By the mid-fourteenth century, workers and artisans had become more infuential in the city government and had convinced the Mint to coin fewer heavy silver and gold coins, thus creating coins with less intrinsic value, which were still limited in number. As the Mint coined fewer and fewer of the heavy silver and gold pieces that were necessary for wholesale trade and industrial production, entrepreneurs and merchants were unable to buy goods and commodities abroad. Starved of coins, Pisa’s economy stagnated.
But this was by no means the end of the golden age of the city. Te economic downturn didn’t last long and in a short time the economy revived. Manufacturing picked up and trading resumed. Goods made in Pisa travelled by land and on local and foreign ships to southern Italy, Spain, northern Europe and France, despite the fact that the Mint was still turning out mostly small-denomination pieces with low precious metal content in small number.
How was this possible? Trade cannot function without money, so how was Pisa able to experience a scarcity of coined money and economic growth at the same time?
Praise for f
“Paolo Zannoni unfolds the logic of money from medieval to modern times. Money and Promises is a deep, fascinating dive into the mechanisms of central banks and how nations depend on them. A masterful account of how money as we know it evolved from national debts and how this financial innovation empowered city-states and new nations.”
WILLIAM N. GOETZMANN, Edwin J. Beinecke Professor of Finance and Management Studies, Yale School of Management
“Through rich storytelling, Zannoni sheds new light on the complete interdependence of banks and states under the guise of debt issuance. The result is a thoroughly enjoyable and readable book about the 500-year history of worldwide banking.”
DAVID J. COWEN, president and CEO, Museum of American Finance
“What is money? In this extensively researched and highly readable book, Paolo Zannoni answers this perennial question by analyzing seven diferent historical episodes in which money and banks coevolved. The theme throughout is the role of money as evidence of debt and the consequent role of the state in supporting monetary stability. This book will help every reader understand the monetary environment of today and tomorrow.”
ANGELA REDISH, professor of economics, University of British Columbia
“Few people are as qualified as Paolo Zannoni to write about the intersection of banking and politics. In this accessible but thoroughly researched book, he reveals seven pivotal moments in history that shaped our modern world. From Venetian lenders to Bolshevik bankers, these riveting stories will leave readers shocked by how old today’s ‘new’ ideas are.”
JAMES
CATHERWOOD, founder, Investor Amnesia