Various Italian city-states excelled in banking as it existed in 15th century Europe. In or around this period, Siena, Florence, Venice, and Genoa each were home to some of the largest European financial institutions of their day. Some lasted for over a century, others for only a small fraction of that time. Though the conditions of 15th century Europe may have been conducive to the survival and development of banking generally, they were not conducive to the survival and development of any singular bank. In Venice, two of the city’s largest banks failed in a 1499 crisis that almost destroyed the entirety of the city’s banking system. This is the first of a two-part series on Venice’s 1499 banking crisis, covering events leading to the failure of Venice’s largest bank.
Venice and Finance
Venice was a major port city trading in spices, silk, and precious metals during the Late Middle Ages and Renaissance. From Venice, silver and copper from Austria and Hungary, along with other metals like tin and mercury, were exported to markets in the Near East. From the east, spices were imported for distribution in Europe. The city was home to many merchants dealing is such commodities and some of these merchants were also bankers.
There was a natural synergy between these businesses. Trade can be capital intensive and some big Venetian merchants used their banking businesses as a source of funding for their voyages and trading activities. The city’s banks were located on the small square in front of the Church of San Giacomo di Rialto by the Rialto bridge. The tight quarters of this square were sufficient because there were not many banks in the city. In the late-15th and early-16th centuries there were usually just three or four principal banks active at any one point; while banking tended to be a concentrated business in Venice, the exact banks did change over time as some came into and out of existence over the years. These few banks may have managed assets of about one million ducats by the late-1490s.
The banks were banchi di scritta; they funded themselves by accepting deposits into accounts on ledgers that also functioned as a means of payment. Deposits would be transferred between accountholders easily, relieving businessmen of needing to hold physical cash. The bank transfer itself, documented in the ledger, could identify the transaction amongst the parties, avoiding the need for any further legal documentation in some simple transactions. The convenience offered by these banks meant they usually did not pay interest on deposits left with them by their clients, who were the city’s wealthy denizens and its merchant community, who were often the same people.
With these deposits, the banks made some loans and held bonds. Many knew the bankers as pawnbrokers, making loans backed by goods like jewels, but they also deployed larger sums of capital by investing deposits in trade ventures and loans to the city’s government. The Garzoni bank, founded in 1430, was Venice’s foremost bank and its oldest as the end of the century neared. From 1471 onward, it lent the Venetian state 1.2 million ducats although this money was not all outstanding at the same time but represents the sum of loans provided, often to hold the government over in between tax collections.
Money in Tight Supply
If the banking crisis about to strike Venice in 1499 was caused by anything in particular it was the city’s wars. At the end of the 1490s, Venice was waging two separate wars simultaneously: one against the Ottoman Empire and another against Florence. So, the fiscally stretched state had to commission new ships to fight the Turks at sea and pay mercenaries to fight a land war in Lombardy. Venice had also been subsidizing its ally Pisa in the war against Florence at great cost.
The overseas war against the Ottomans did not just increase the state’s need for money; it also damaged Venetian trade as the fighting closed markets to the city’s merchants. Inventories of goods like copper accumulated in Venice, tying up a lot of money, and merchants were unable to convert these stores into liquid funds by offloading them with their usual buyers. That said, notwithstanding the problem of mounting inventories, the main avenue by which the wars underway broke the city’s banking system was by means of a liquidity crunch triggered by the government’s overborrowing.
These wars required large forced loans, the means by which the Venetian state customarily financed its war expenses without large tax increases. Compulsory loans, known as the monte vecchio before 1482 and the monte nuovo afterward, were raised through periodic assessments called diecima. These had become quite common. Ten such decime were levied during the war against Florence. By the end of 1498, many people were unable to contribute further to new loans so the loans were going unraised. The price of monte nuovo bonds, representing the right to repayment of these forced loans, traded on the secondary market and sales of these bonds were how many paid for new assessments. Yet, this practice was becoming unsustainable as bond prices were plummeting.
The government seized property of those who could not meet their assessments but auctions of this property raised little money as prices were generally depressed in the city. There were simply too few buyers with access to enough money. The banks were in no position to lend someone the money to bid either. With each of these forced loans, deposits had no doubt been withdrawn from the banks to allow taxpayers to meet their loan assessments. Since the money raised went to fund armies and navies abroad, much of this money was essentially leaving the city altogether rather than returning to the banking system by means of domestic government spending. Amidst this shortage of liquid money, the banks had to begin offering 3% interest to retain or replenish deposits, a new development in Venetian banking.
Failure of the Garzoni Bank
Before too long, rumors circulated about trouble with the Garzoni bank. Along with the difficult financial conditions in the city, the Garzoni bank was allegedly being plagued by rumors spread by Florentine merchants across Europe undermining the financial strength of Venice. Besides spreading bad news, they were also withdrawing their own money from Venice. Some 40,000 ducats were withdrawn from the Garzoni bank by Florentines. For some comparison as to the amounts involved here, consider that the income of a skilled worker in Venice’s shipyards may have been just 20 ducats a year. Of more relevance, the annual income of the wealthiest merchants in the city would have ranged between 2,000 and 20,000 ducats.
It seems the bank was also forced to pay a premium for silver in order to desperately augment its own reserves of precious metals, suffering losses in the process; these operations were said to have cost the bank 30,000 ducats over the preceding four years according to Venetian diarist Domenico Malipiero. Adding to this was the incremental 20,000 ducats in interest expense paid by the bank, though over an unclear amount of time.
The Garzoni family asked for help and Venice’s state, led by its Doge, provided support to their bank. The government repaid perhaps around 25,000 ducats of debt held by Garzoni and helped cobble together some loans to the bank from different sources. However, some members of Venice’s aristocratic Senate, made aware of the bank’s difficulties, withdrew their own money so the actions did not resolve the situation. Indeed, it did little compared to the scale of what was needed. In the month of January 1499, 130,000 ducats were withdrawn from the Garzoni bank, which includes the 40,000 in Florentine withdraws already mentioned. This was a stunning fraction of overall Venetian banking liabilities, let alone a pace of withdraws that a single bank could have sustained.
The Garzoni bank declared bankruptcy on February 1, 1499. A crowd had been amassing outside the bank’s offices but they never opened that day. Estimates of the potential losses were initially very unclear. The bank defaulted on debts of perhaps as much as 250,000 ducats, though with the quick pace of withdraws in the preceding weeks, the exact amount is uncertain. Against this, the bank possessed good loans of perhaps 45,000-75,000 ducats and real estate worth 45,000 according to another contemporary diarist Marino Sanuto. Other assets were government bonds worth 20,000 ducats and jewels and silver of 15,000 ducats. That said, the specifics are mere estimates. Also, some of these loan assets may have been due from family members; it was said that the bank had allowed overdrafts of accounts by family.
“This morning at Rialto a considerable crowd gathered at this bank to withdraw money, but even by a late hour none of the Garzoni had come to the bank. Therefore, everyone became suspicious, and there was much grumbling throughout the city. And I do not wish to neglect recording that 500 ducats that my mother had received from a legacy had been deposited in this bank. Since I knew what was happening, I ordered ser Lunardo, my brother, to withdraw it, and so he did, so that on the eve of the holiday he withdrew from the bank these 500 ducats and had that number of Hungarian gold ducats.” – Diarii of Marino Sanuto, Volume 2
A Crisis Unresolved
The story hardly ends with the failure of a bank this large. The government attempted to mediate a dispute between the bank’s creditors, who wanted control over the repayment of their debts put in the hands of a committee of creditors, and the bank, which wanted to manage the process itself. A group of German creditors arrived before Venice’s government with a lawyer to plead for their own relief. They wanted either that a legal safeguarding over the Garzoni’s assets be lifted so that they could use those to repay what was due to them or to secure protection from their own creditors in the city so that these merchants could extend the repayment of their own debts.
No doubt these merchants were now in a difficult situation too. Here one can see how when money is frozen in one bank failure, it only aggravates further the rush for liquidity regardless of what the popular perception of the other banks may be. People need to right their own situations. So, the rush for tangible money moved on. In the aftermath of the Garzoni bank’s failure, the largest in the city, the market price of government bonds fell to just 59% of face value. The pressure also stepped up on the next largest bank, the Lippomano bank, which would also fail in this panic of 1499.
Lesson
The Garzoni bank had been put in perilous position by the draining of money from Venice as whatever resources available were diverted to satisfy the government’s wartime needs, often meaning the money was sent abroad. Before too long, money had become so scarce that asset prices, whether for securities or real estate, had fallen. At this point, it is possible that a bank like Garzoni’s may very well have already been insolvent. There may have been factors that made that bank more vulnerable but these major drivers were not unique to it. So, the crisis went on and claimed further victims.
More from the Tontine Coffee-House
Read about Venice’s monte vecchio and monte nuovo bonds and the many banks in Tuscany in the 13th and 14th centuries. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Kittler, Juraj. “Too Big to Fail – the 1499-1500 Banking Crisis in Renaissance Venice.” Journal of Cultural Economy, vol. 5, no. 2, May 2012, pp. 165–78.
2. Lane, Frederic C. “Venetian Bankers, 1496-1533: A Study in the Early Stages of Deposit Banking.” Journal of Political Economy, vol. 45, no. 2, Apr. 1937, pp. 187–206.
3. Mueller, Reinhold C. “The Making of the Panic of 1499-1500.” The Venetian Money Market – Banks, Panics, and the Public Debt, 1200-1500, The Johns Hopkins University Press, 1997, pp. 230–51.
4. Sanudo, Marino. “Chapter 5: Economic Networks and Institutions.” Venice, Cità Excelentissima – Selections from the Renaissance Diaries of Marin Sanudo, edited by Patricia H. Labalme and Laura Sanguineti White, translated by Linda L. Carroll, Johns Hopkins University Press, 2008, pp. 227–84.
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Ken Romanowski