Affordable Housing Institute : US

Because catastrophe is a precondition to fundamental financial reform, we should expect the history of banking and bank regulation, like that of evolution, to proceed in fits and starts, with a great die-off preceding a revival in a new, more complex form.

 

Genoese admiral Andrea Doria, by Sebastian Piombo

 

[A similar meltdown] happened a hundred years ago, in the Panic of 1907 – which lead directly to the creation of our Federal Reserve Banks, as testified by New York Fed CEO Tim Geithner to Congress on April 3, 2008:

 

Geithner getting a grip on financial history

 

[Geithner's testimony – Ed.] Congress created the Federal Reserve after the Panic of 1907 with broad authority and a range of instrument … in recognition of the need for a public institution to perform the role of lender of last resort.  When the Federal Reserve was founded, there was no deposit insurance, so the willingness of individuals and businesses to hold deposits at a particular bank depended wholly on their degree of trust that the bank would be able to promptly furnish them with the money they had deposited—whenever they might request it.

 

As the country debates Secretary Geithner’s aggregator bank proposal, it may be comforting – or not! – to discover that such a concept originated at least half a millennium ago, in Genoa, as reported by a diverting article in the Economist:

 

Genoa’s Banco di San Giorgio building

 

An Italian archive yields its treasures

 

If European banking was invented anywhere, it was probably in Genoa in the 12th century, spurred on by the revival of trade in the Mediterranean. That, at least, is the case convincingly put forward at a website devoted to the history of the bank of San Giorgio. The site was formally launched at the end of 2008 at the conclusion of a 25-year study of Genoa’s early economic history in the voluminous and carefully preserved state archive. The prize possessions are documents from the 12th century describing financial instruments that are commonplace today.

 

An etching of San Giorgio, from the seventeenth century

 

With its rival Venice, Genoa was a principal trading and shipping hub, and being the closest large port to the Pillars of Hercules and the Atlantic, Genoa was far better placed to lead the global expansion spurred in the mid-fifteenth-century by improvements in shipbuilding and celestial navigation.  No surprise, then, that a hub of commerce was also a hub of finance – America’s first financial capital, Boston, similarly paired money and venture with the China trade, before giving way to New York City.

 

The first recorded public bond is dated January 1150 when the municipality raised 400 lire by granting to investors the tax revenue raised from stallholders in the marketplace.

 

This is exactly analogous to the Redevelopment Areas (RDAs) used today by California municipalities to finance public infrastructure – or, in a slightly different way, to the repayment of Sao Paulo’s slum upgrading infrastructure costs by levying a surtax on water and then financing the stream via an IDB loan.

 

Municipal infrastructure, financed via a surtax on water: Jardim Iporanga, Sao Paulo, Brazil

 

The term was 29 years, and the loans were described as compere—or purchases—to evade the church’s usury laws.

 

Presenting a loan as a purchase-and-repurchase is exactly the dodge used today in Islamic finance: 

 

For financial markets, and particularly for home ownership in an urbanized world, the wheel of commerce is the loan — debt finance, renting money on an agreed basis for a stipulated time. Without it capital is sluggish, and when capital is sluggish, so is the economy.  

 

Amazing scholarship: Fernand Braudel’s marvelous The Wheels of Commerce

 

Islam lacks the financial wheel because of some words Mohammed is said to have uttered on his deathbed. As reported in the Wall Street Journal:

 

The barrier that Islamic financial modernizers are trying to overcome is the Quranic prohibition on receiving or paying interest: “Allah permitted trading and forbade interest.”  While ignored by many secular Muslims and the conventional banks that operate in most Muslim nations today, this ban has long denied the benefits of modern banking to strict believers — contributing, some say, to the Muslim world’s relative decline after interest-based bonds and loans powered the West’s Industrial Revolution.

 

For the Indians, travois were good enough — nobody had competitive advantage, and everybody got around, albeit inefficiently — until the Europeans arrived with the wheel, whereupon travois technology became instantly obsolete. In roughly the same way, Islam’s heartland in Arabia is being confronted with an import arising from outside, in this case Malaysia:

 

Six years ago, a Malaysian bank asked 80 financial institutions in the Persian Gulf for help in selling a corporate bond that complied with Islamic prohibitions on interest.

 

The corporate bond is a work-around — an object reverse-engineered around an obstacle, in this case the Quranic prohibition — to achieve the same results indirectly as if the obstacle were absent.

 

For legal purposes, that’s a straight line

 

This multi-century parallel tells us something about global finance and Islamic finance:

 

The good news is that Islam has developed a workaround past religious prohibitions on ‘usury.’

The bad news is that Islamic finance has 800 years of catching up to do.

The better news is that the catching-up can occur very quickly, if Muslims want it to.

 

Meanwhile, back in the early Renaissance:

 

In the 13th century tradable government bonds were issued in Genoa, paying 7% interest. In the 14th century the first sinking funds were organised in Genoa; and, 100 years later, the first lottery. Giuseppe Felloni, a Genovese historian and numismatist, has written a commentary on this impressive list of historical firsts in a 91-page pamphlet, “Genoa and the History of Finance: A Series of Firsts?” A fuller account and the pamphlet itself (.pdf) can be found on Mr Felloni’s website.

 

Written in Italian and a proudly grandiloquent English

 

According to Felloni, the bank as financial institution was invented in Genoa:

 

By the 15th century Genoa’s finances were in such a parlous state that in 1407 the municipality established a private bank to consolidate its debts and called it the Bank of Saint George.

 

What is a bank, anyhow?  And why did people invent it?

 

When commerce was in barter, one had no need for banks, merely for strongboxes. 

 

1880 strongbox

 

Today’s modern equivalent is the safety deposit box – a place to keep items of value, be they monetary or otherwise. 

 

Lot of strange things in those boxes

 

When wealth turned into money, money requires investment (”Money is like muck; not good unless it be spread” – Francis Bacon, 1625), which requires a money store.  Because it’s difficult to bind the sovereign, banking emerges as the alternative to taxation and confiscation.

 

Commercial moneylenders already operated alongside the bond market (they were known as banchieri) but the Bank of Saint George was the first institution in Genoa that could be called a bank.

 

General ledger from the Banco di San Giorgio, 1453

 

It also operated as a giro bank and it stayed in business for 400 years. It was not the first in Europe; a giro bank in Barcelona beat them to it by six years.

 

Banking was essential because Genoa was both wealthy and a huge trading port.  The Renaissance was fueled with capital – ships were a vast undertaking, both to develop and to outfit for a long and risky voyage to the East or West Indies.  As Felloni quotes (page 14):

 

A powerful master is Sir Money.

Born with honors in the Indies.

Where everybody befriends

It arrives in Spain to die.

And then is buried in Genoa.

 

El Rey Felipe II of Spain:

The richest man in Christendom, but he went bankrupt

 

To be an entrepreneur, one needed to raise money.  To be a capital provider, one needed to invest money, and it needed to be on deposit with someone.  Whoever held the deposits had to remain solvent throughout the deposit period.  According to Felloni, the Genoese invented the bank as a recapitalization strategy:

 

By the 15th century Genoa’s finances were in such a parlous state that in 1407 the municipality established a private bank to consolidate its debts and called it the Bank of Saint George.

 

In other words, the municipality of Genoa was the ‘bad bank’ whose debts were consolidated and then (presumably) recapitalized by the rich Genoese merchants, so they had a source of ongoing liquidity. 

 

In fact, they didn’t stop there.  Author Felloni claims the following Genoese firsts:

 

First public bank (Banco di San Giorgio)

Government bonds

Public debt

Public debt reforms

Repayment of public debt and sinking funds

Discount of public debt coupons (TARP, anyone?)

 

Felloni thinks the Genoese got there first

 

Double entry and public accountancy

Lottery and selection to public office

Clearinghouse

Protection of financial capital

 

Aided in part by its mastery of finance, Genoa boomed, vying with Venice for Mediterranean supremacy.

 

Genoa, 1720, prosperous and independent

 

As Harry Lime put it in The Third Man:

 

The cuckoo clock … Goodbye, Holly

 

Don’t be so gloomy. After all it’s not that awful. Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.

 

Meanwhile, back in Italy, the Renaissance flowered:

 

The oldest bank still in business is Italian, however. Monte dei Paschi di Siena was founded by the municipality in 1472 to give loans to the poor at better rates than those offered by the moneylenders: a business model that has persisted for half a millennium.

 

Banking in Siena …

 

Banking, charity, and affordable housing – tied together since the inception of banking. 

 

… since 1472

 

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