What banking and public finance have in common might not be obvious. However, in their histories, the two are joined at the hip. Indeed, some of the oldest banks have their origins in public finance. Counterintuitively, this includes central banks with roots as private organizations. The Bank of England, for example, was founded as little more than a private investment fund in the public debt, long before it started fulfilling the functions of a modern central bank. The Bank of England had its origins in an Italian firm from Genoa, the Banco di San Giorgio. This bank was arguably the first universal bank, combining merchant banking, public finance, and deposit banking functions under one roof.
During the Renaissance, of which it was at the forefront, Northern Italy was not an unlikely place to see the birth of banking. This is especially true of Genoa, the great trading city on the northwestern Italian coast. Governed by its republican ‘Council of Ancients’, the Republic of Genoa was something like the Venice of the Western Mediterranean but its power spanned much of Southern Europe and as far east as the Black Sea, from Crimea to Corsica. Like Venice, Genoa’s power dated back to the Crusades which forged mercantile and logistical connections between the city and the rest of the Mediterranean.
Unsurprisingly, the city came to be a rival of Venice and this rivalry shaped not just the political and military histories of the two city-states but even their contributions to finance. It was the frequent wars with Venice that forced financial innovations in both cities. In the case of Genoa, the Battle of Chioggia in 1381 ended one of several of its wars with Venice in Genoese defeat. It also brought the Genoese state close to bankruptcy. These fiscal crises were not exclusively destructive though and this late-14th century crisis helped bring about something new, one of Europe’s first universal banks, a bank engaged in both deposit and investment banking functions.
Banco di San Giorgio
This bank, the Banco di San Giorgio, was at the center of a fiscal restricting underway in early 15th century Genoa. It was founded on March 2nd 1408; its creation having been authorized the prior year. Among its eight wealthy founders were the city’s leading citizens, including one of the Grimaldis, today the royal family up the Ligurian coast in Monaco. Once operations got underway, the bank consolidated much of Genoa’s state debt with 7% interest securities which it then sold to investors, a debt structuring and placement that resembled a quintessential investment banking activity today.
The fiscal restructuring was just that, debt consolidation. The Banco di San Giorgio was essentially purchasing state bonds, called compere, with interest rates ranging from 8% to 10% and issued stock yielding 7% to its investors. These investor-creditors would purchase these shares in the bank, called luoghi, which held loans to the state. For investors, the luoghi were taking the place of the compere that previously made up the circulating debt. However, the consolidation of the public debt into a single security made the debt more liquid. Investors were now more able to buy and sell the securities rather than holding them to maturity. Indeed, it was in Genoa and Venice where the sovereign debt markets were born.
However, the Banco di San Giorgio was more extraordinary than a fund holding public debt. It also collected taxes on behalf of the state. The reason for this was that it allowed the bank to bypass usury laws. Because its returns were in the form of directly collected taxes as opposed to interest payments, it did not attract ecclesiastical censure. The Banco di San Giorgio’s business model essentially combined long-term lending, with terms of five years or longer, and tax farming. It was the bank and not the state that collected duties at Genoa’s customshouse, the dogano, for example. Control over these taxes gave the bank revenues roughly equal to that of the Genoese state itself and the bank also managed a sinking fund for the public debt that was designed to periodically reduce the outstanding stock of bonds.
Regardless, the intriguing practice of structuring state loans as sales of tax revenue streams was centuries old in Genoa, being used as early as 1150 when a bond issue was launched in which creditors were given the fee revenues paid by merchants using market stalls in the city. After all, the old debt issues were even called compere, which literally translate as ‘purchases’ rather than ‘loans.’ This model was even copied in Venice very soon after its introduction in Genoa in the 12th century.
Besides managing the state debt in such a far-reaching manner, the bank also provided more typical banking services by modern standards. San Giorgio was permitted to accept deposits, transfer money, and extend credit to private individuals. It used deposits to lend to creditors against the value of their luoghi. It also allowed bondholders to unlock the value of the accrued interest on their bonds, called paghe, by advancing these payments at a discount.
Because the Banco di San Giorgio offered deposit accounts, bank deposits came to form part of the money-supply in 15th century Genoa, a substitute to using metal coins in trade. The combination of investment and deposit banking activities under one firm means the bank was among the first universal banks in Europe, even if the legal form of its lending is archaic by our standards today. Modern knowledge of the many services offered by the Renaissance-era bank owes much to Giuseppe Felloni, professor emeritus of the University of Genoa, who has combed through volumes of the bank’s records from its four centuries in business.
The bank was in a peculiar legal position owing to its relationship with the state and the power of religious authorities. The relationship with the state, which was both its debtor, regulator, and most important customer may have created a conflict of interest between the bank’s investors, the luogatari, and the state. For example, every extension of new credit to the state diluted the tax revenues given up to repay the debt. Yet, the very raison d’être of the bank was to extend this credit.
Compromises had to occasionally be made. When inadequate revenues caused debt repayments to be deferred, the bank created a secondary market were creditors could sell interest payments owed to them, the paghe, at a discount. This was a novel creation considering that the legality with respect to usury of selling bonds at a discount was only established in 1456 by Pope Callistus III.
State within a State
As the only bank of note in one of Europe’s leading commercial cities, the Banco di San Giorgio was powerful, if not across the continent then at least in its home country. As the bank continued to place debt on behalf of the Genoese government, further state properties were given up to collateralize the borrowing. In time, entire Genoese colonies from Corsica to Crimea were put under the bank’s administration, which the contemporary political scientist Niccolò Machiavelli viewed as more just and sound than that of the government itself. Across these territories, the bank administered not just taxation but even the colonies’ supply and defense.
“When the Genoese … being unable to satisfy the claims of those who had advanced large sums of money for its use, conceded to them the revenue of the Dogano or customhouse, so that each creditor should participate in the receipts in proportion to his claim, until the whole amount should be liquidated … Their credits were divided into shares, called Luoghi, and they took the title of the Bank, or Company of St. Giorgio.” – Niccolò Machiavelli, Florentine Histories, Book VIII, 1532
There was a high cost to these extensive operations and one might think that the state was the ultimate beneficiary of offloading the costly administration of its empire to the bank. Either way, in 1562, the bank returned control over certain territories to the state after the cost of that broad administration became too high to bear, having caused the bank to run losses most years. That said, the close relationship with the state did bring advantages to the bank. For example, its closeness with the governing authorities helped it collect on debts, prohibiting merchants who had defaulted on loans from docking their ships in Genoa’s harbor for example.
As the Renaissance went on, the city’s relative power diminished. The Age of Discoveries had the potential to be disadvantageous to Italian trading cities as new routes for Eastern trade were journeyed and new sources and types of raw materials discovered. Curiously, San Giorgio counted one of those responsible for these discoveries as perhaps their most famous customer, Christopher Columbus himself. Despite the threat posed by the discoveries, the city and the bank continued to prosper, helped by the fact that the changing connectedness of the world was increasing trade overall.
There were further threats to the Republic of Genoa from the east however following Ottoman incursions on Genoese colonies in the Mediterranean. Nevertheless, further riches came to Genoa, or at least the Banco di San Giorgio from the west. This is because the bank went on to serve the Habsburg monarchy, which protected the city. Through their Spanish holdings, the Habsburg family controlled the precious metal supply of the Americas, a wealth that the bank served and shared in. That said, Spanish power eventually diminished, and so too did that of the bank, in the 18th century.
The end for the Banco di San Giorgio came at the hands of another emperor. The Coup of the 18th of Brumaire brought Napoleon Bonaparte to power in France and from Paris he controlled much of Europe, including Genoa which had been overrun by the French. So, in 1805, following the annexation of the city by France, Napoleon had the bank shut. Napoleonic Europe only needed one state bank, the Banque de France. Nonetheless, besides its legacy, more heritage from the Banco di San Giorgio survives to this day: reems of centuries-old records and the bank’s headquarters. The old headquarters of the bank stands to this day, a structure that even pre-dated San Giorgio by 150 years and has since outlived it by more than that long.
The Banco di San Giorgio, and the Italian fiscal system of the early modern period more generally, reveals much about the history of finance. Consider that the Bank of England, formed nearly three centuries later, also started out life as more or less an investment vehicle for government debt. It had its origins in, and has been said to be explicitly modelled after, San Giorgio in Italy, and like the latter, it developed far more varied business lines. Indeed, much of the British financial revolution of the late 17th and early 18th centuries had its forerunner in northern Italy, where institutions that predated their northern heirs were in decline just as the latter were getting started.
More from the Tontine Coffee-House
Read more about Genoa’s fiscal system and his sovereign bonds. Also, learn about Venice’s own fiscal restructurings.
1. Boland, Vincent. The World’s First Modern, Public Bank. Financial Times, 17 Apr. 2009.
2. Felloni, Giuseppe. “A Profile of Genoa’s ‘Casa Di San Giorgio’ (1407-1805): a Turning Point in the History of Credit.”
3. Felloni, Giuseppe, and Guido Laura. Genoa and the History of Finance: Twelve Firsts? 2014.
4. Fratianni, Michele, and Franco Spinelli. Did Genoa and Venice Kick a Financial Revolution in the Quattrocento?, Österr. Nationalbank, 2006.
5. Machiavelli, Niccolo. Florentine Histories, Book VIII, Chapter VI. 1532.