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G - 115 : Galleys are good - Clearing is better


The Piazza dei Cavalli in Piacenza where the Claims Clearirng took place four Times a Year


Early January I wrote a blog “Bankers are good – Galleys are better”. I had assumed that Spain let Genoa have its banking business for the 60 Genovese galleys that were protecting Spain’s Mediterranean interests. To pay for its conquest of Granada, the last Muslim state in Iberia, Spain let its navy shrink to dangerous levels. When Granada was taken in 1492, the number of Spanish galleys had dropped to 12. The Ottoman Sultan had 250. Spain could not defend its Mediterranean possessions any longer.

Battle of Sesimbra Bay of Portugal in 1602. 5 Royal Navy sail ships attacked 12 Spanish Treasure Galleys and captured one


Am convinced that Genovese galleys transported Spanish silver though the Mediterranean. But I could not find any evidence. Of course these transports were done top secret. But did the Genovese have an even better method for keeping Spanish silver safe and out of Ottoman hands?

Trade Routes in Europe in the 14th Century - Besancon in the Franche Compté is missing


We know that Spanish silver financed the war in the Netherlands and Austria’s war against the Ottoman Empire. Relatively little silver was shipped physically from Genoa to Brussels and Vienna. The Genovese bankers cleared most payments at the quarterly fairs in Piacenza, a town near Parma. They only ship the net amount. Wonder how big this net number was as percent of the total? This then allows me to estimate the shipment risk.


Marinus von Reymerswaele - the Tax Collectors -

16th Century. The Bankers did not look any better


Rather than speculating, I took a research paper on medieval clearing, which I came across, and set up an experiment with five counterparties (A to E). These parties traded with each other. Their mutual claims and credits are reflected in the fictitious balance sheets I set up. To make netting easier, I matched account receivables and accounts payables. I know real trading is different. Some merchant always ends up with an unmatched position. For these events, they had equity to compensate and balance their books.

My little Experiment in 6 Clearing Cycles - please enlarge the Table with your Fingers


Claims clearing was done in many places in Europe. The biggest were Piacenza, Besancon (when it was still Spanish), Frankfurt and Leipzig. More than 60 bankers regularly attended the fairs in Besancon. The number was 110 for Piacenza, most of them Italians. Clearing of claims was a self-regulated activity. Anybody who had earned the trust of the clearing participants was accepted. Everybody had to deposit a certain amount of silver to settle the resulting net amount once there were no claims left to clear.

The Town of Piacenza on the River Po how it looked in the 16th Century


4 important prerequisites had to be met to make claims clearing possible.


1. Only trusted people could participate. A break in the clearing chain would lead to defaults for several counterparties and threaten the entire clearing chain

2. Participating merchants and/or bankers had to have a general ledger to know their positions with each participating merchant

3. All bills of exchange had to be physically presented for examination, acceptance and reconciliation with the ledgers

4. The bankers had to set prevailing exchange rates for the fairs – at that time every town and county had its own money

Medieval Money Changers with their Banca which gave Banking its name


With these four prerequisites and the safety deposit in place , claims were assigned, re-assigned and re-assigned until any outstanding balance was settled. Defaults in the clearing chain were extremely rare. Everybody knew each other. Banking was a family business. The default of one family member would drag down the entire family – so families took care of their black sheep. And everybody wanted his safety deposit back!

Another Painting from Marinus von Reymerswaele showing Tax Collectors clearing Bills


In my little experiment, see table above, I started with netting the gross amounts on all balance sheets. Then – with no help of math - I looked for netting opportunities. To illustrate it with an example, seen from counterparty A, I asked: Could I pay party B with a claim I have on party C? Every claim assignment reduced the balance sheets of my counterparties. After 6 cycles the claims were netted to zero. Have to admit that the result surprised me. In total, without netting, I would have had to ship 6’300 silver coins to settle. After my six clearing cycles, only bills of exchange had changed hands.


Handwritten General Ledgers made it possible to keep

Track of all the Bills of Exchange issues


What looks easy was very challenging a few hundred years ago. We benefit today from so many standards; we are mostly unaware of them. Current exchange rate? No problem – get it from Bloomberg. Form for a bill of exchange? No problem – look it up on Google. Finding your counterparty position? No problem – switch on your laptop. In the 16th century, it was far more complicated and time consuming. Finding netting opportunities between my five counterparties took less than half an hour – documenting every step took most of the time. In Piacenza, claims clearing took a full week. Sometime merchants arrived late. Sometimes a ledger was missing – there were no back-ups. Sometimes there were no news on the latest exchange rates from far away.

Claims Clearing required Bankers to keep long Records of Transactions in their Ledgers


The clearing job required a high degree of specialization. Merchants and bankers needed to know the trustworthiness of every single clearing participant, understand dual-entry book keeping and general ledgers, know how to compute multiple exchange rates from gold and silver weights, recognize diluted money, being able to write and examine bills of exchange and how to endorse and re-endorse them. They also needed capital to pay the safety deposit. As always, rare skills get rewarded well.

The Card Sharks from Caravaggio (1595) could depict young, wealthy Genovese


The Spanish monarchs and nobles were skilled warriors and administrators but did not have any idea of the sophisticated banking techniques developed by Genoa, Venice and Florence since the 12th century. Roman and medieval trade routes bypass Spain. There were some skilled Spanish merchants in the realms of the former Kingdom of Aragon – specifically in Barcelona and the Baleares. But Spain’s silver from Latin America arrived in Seville – far away from any Aragonese merchant. There was a colony of over 40 Genovese bankers though willing to help - and take a cut of 10% on each transaction.

The Spanish Treasury Fleet departing from Havana in 1628 full with silver Ingots from Petosi


Genoa’s galleys were certainly important for the Spanish crown. They helped to check the Ottoman corsairs – at least partially - and were vital during the Battle of Lepanto in 1571 when the Ottoman fleet was destroyed. But on a strategic level, handling payments without having to physically ship silver was even better. A pirate could do nothing with a captured bill of exchange. It was simply invalidated and re-issued. Claims clearing as a tool in managing strategic security and keep Spanish silver out of Ottoman hands – makes perfect sense. Galleys were safe - Clearing was saver.

Could not find a Painting of another Spanish Galley - this one is French


Last but not least, an exchange bill-based payment system would explain how so much Spanish silver flowed physically to the Far East where it was used for arbitrage trades. In Europe, one ounce of gold cost 10 – 12 ounces of silver. In Asia, with far fewer silver mines, the ratio was 1 : 8. We now live in a world where price finding is global. But there was a time when gold prices differed region by region.

Global Flow of Silver 1725 - 1750

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