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D - 7: How did Genoa get around Usury Restrictions?

A few steps behind Palazzo San Giorgio, which housed the famous Bank of St Georges, is the quiet and small Piazza Banchi where once Genoa’s bankers unfolded their benches every morning, covered them with a carpet and opened for business. It is remarkable how small the place is given that it financed trade with the Levant, from Crimea and North Africa. Of course, the big families like the Dorias or the Spinolas would not do business here. They had their own palaces. But the many sailors and rowers who had a personal allowance for each trip came here to exchange their foreign species for the local currency or settle trade bills they brought home. Piazza Banchi has about the same size as the Campo San Giacomo di Rialto where the Venetian bankers did their business.

Piazza Banchi in Genoa today

Whilst small, both places stand at the heart of a revolution which would allocate capital to where it was needed and reward people for letting others work with it. It was the creation of the modern financial system as we know it. It started from humble beginnings by meeting the needs of the young mariners who rowed and sailed the Genovese galleys . Where would a single young man who just returned from his overseas trip leave his profit when embarking on his next? In a good year, he could do 2 roundtrips to the Levant or 4 to North Africa. With his banker of course! He could earn a handsome profit whilst being away. But how would the Genovese bankers get around the usury restrictions which the Catholic Church imposed?

Jesus chasing the moneylenders from the Temple – Arundel 157 f. 6v

Regulations against usury have a long tradition. Earliest examples can be found in Buddhist texts and the Old Testament. We all know the story of Jesus chasing the moneylenders from the Temple. A deed that did not endear him with the Jewish community! The roots of the Catholic restrictions on taking interest on loans go back to Roman time, however. In the final century of the Roman Empire, the silver content of the official sesterces had been diluted to zero. Whilst the farmers had to sell their goods in the markets for worthless money, the Empire insisted that taxes were paid in gold. Farmers had to borrow to meet their tax obligations - often at interests of 10% per month. Of course, they could not repay and became permanent debtors. Their only chance of staying free was fleeing to the big cities where food was handed out for free. But the big lenders knew that too and saw to it that farmers with debt had to stay on their land. Respective laws were quickly put in place. The Roman citizens had lost their freedom and descended into serfdom.

Council of Nicaea in 325 AD in a 16th century fresco – the painting is actually wrong – Emperor Constantine presided over the council - not one of the four patriarchs (the pope was just one of them, the others were from Alexandria, Antioch and Constantinople)

This misery was not hidden to the Catholic church who became under Constantine the dominant creed and upon his death the Empire’s official religion. The Council of Nicaea which resulted in the first uniform Christian doctrine, also forbade clergy from engaging in usury. Given that by 400 AD the entire Roman Empire had converted to Christianity, this rule had quite some bite. With economic activities in steady decline after the collapse of the Western Empire, however, there was no need to develop these restrictions further. Nobody borrowed money when farmers were serfs of the local nobles and the concept of Free Men and free economic actors was gone. With the resumption of economic activities in the 10th – 12th century, these rules were refreshed though. In 1311 at the Council of Vienna it became a heresy to allow usury in secular laws. The impact of the Church was well felt on the banking business.

Medieval Money Lenders - business was done like this until the 19th century as I could see in the archives of Lombard Odier & Cie

But there were still deposits to be taken and people looked for investment opportunities. A solution similar to today’s Sharia compatible investments was soon found. Paying interest was illegal but interest could be included in forward exchange rates. Since every town had its own currency an exchange was almost always part of a contract. Interest could also be used to discount loan instruments similar to today’s zero-coupon bonds. When a coupon was actually required, it was defined as an investment return. There were ways to get business done without the church getting in the way.

Communal Fight in Bologna between the party of the Ghibellines and Guelphs

The power struggle between Pope and Holy Roman Emperor which arose in the 12th and 13th century from the dispute over investiture may have given Genoa the break from church interference it needed. In a nutshell, Pope and Emperor disagreed on who had the right to select the Emperor. Was it the Pope as God’s deputy or the coronation council composed of 7 dukes? The disagreement turned first into a dispute then into an open fight. But it was not a fight over investiture – it was a fight over how much absolute power the Emperor held and whether he was able to build a Byzantine style empire where the Patriarch of Constantinople reported to the Byzantine Emperor. The Italian towns split evenly, Genoa came down on the Pope’s side. A decentralized Empire was definitely in its own interest. Given that Genoa was rich and 10% of all church revenue went to the Pope, I wonder how strongly the Popes desired to enforce strict usury rules. Genoa was vital to finance the war against the Emperor. “Pecunia non olet (money does not smell)”, said once the Roman Emperor Vespasian. May also have been true for the Popes.

Giovanni d’Andreae (1275 – 1348) on his sarcophagus, today exhibited in the Medieval Museum of Bologna

Was it also a coincidence that the famous Italian export in cannon law, Giovanni Andrea (1275 – 1348) commented on the legality of usury at the same time? Here is a quote from the site: “Giovanni points out that in the Roman period usury was tolerated and allowed. He goes on to write that civil law does not have to prohibit usury because it did not injure society. Nor does civil law have to prohibit usury because it is prohibited by cannon law. Although usury was sinful, this alone did not make it against civil law. Other sins were permitted or at least tolerated in medieval society…” And that is how prohibition of charging interest fell away. It stayed on in cannon law for much longer, but as the civil society grew larger, the impact of cannon law shrunk. The onset of the protestant reformation did the rest. The Austrian law expert Georg Jellinek called this much, much later the “normative power of reality” (die normative Kraft des Faktischen). What is interesting is that we have today the same discussion about the finance in Islamic societies. The solutions found so far seem to be similar to the Genovese approach 700 years earlier. As I said yesterday: history sometimes naps but it never sleeps.

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