talaipwrosVillani (13.43) unleashed invective against Florence’s new rulers, calling them “artisans, manual laborers, and simpletons,” and complaining that “the majority of the guild consuls, by whom the commune was then being ruled, were lowly guildsmen just arrived from the countryside, or foreigners, to whom the republic mattered little and who were even less capable of governing it. Willingly do they pass laws with much haste, but with no foundation in reason.” Villani’s bitterness spoke here, perhaps because he had been a partner of both the Peruzzi and the Buonaccorsi. In fact, the new government, far from being incompetent, met the still unresolved dilemmas of the public debt and the looming bankruptcies with innovative policies that succeeded in bringing down the economic powerhouses of the preceding two generations.
The new popular government first addressed the debt. On December 29, 1343, it consolidated the commune’s outstanding debts into one “mountain,” or Monte, of indebtedness that approached 800,000 florins and suspended interest payments, intending to repay the principal to creditors. In 1344 shares were made negotiable; creditors unwilling to wait for repayment could now sell their credits for whatever price they might bring on the market. By early 1345, according to Villani (13.36), the debt was reduced to 570,000 florins, but it had become clear that full amortization was unlikely or impossible. In February a priorate that included a used-cloth dealer, a butcher, a dyer, a notary, the father (Coppo) of the chronicler Marchionne Stefani, and only one member (a Machiavelli) who would qualify for the second rank of elite families, presented to the councils a proposal that radically transformed the administration and nature of the debt by terminating (actually prohibiting) repayment of principal and commencing 5% annual interest payments in perpetuity. Since the law required the assignment of 2,074 florins each month from the gate gabelle to pay interest, which amounts to just under 25,000 florins for the year, total indebtedness was evidently 500,000 florins at the
moment the Monte was funded. To the bankers and merchants then negotiating with creditors and desperately in need of liquidity, the law of February 1345 was a calamity. Someone with 1,000 florins in the Monte from loans made at, say, 15% expected 1,150 florins if the loan was repaid after one year, and 1,300 (or slightly more with compounding) if repaid after two years. With the suspension of interest payments at the end of 1343, he still expected the principal of 1,000 florins. But he was now told that he would receive just 50 florins a year without return of principal. Creditors would have to wait twenty years merely to recover the equivalent of the principal. And for those seeking to sell their shares, the reduction of interest to 5% caused a precipitous drop in their market value estimated at 70–75%: those 1,000 florins in credits were now worth only 250–300 florins. The collapsing banks thus saw huge amounts of wealth disappear just when they most needed either to sell or redeem their shares.
But in August 1345, six months after funding the debt and terminating the repayment of principal, another law invited voluntary investment in the Monte and reinstituted return of principal under certain conditions. To raise 50,000 florins, the government allowed Monte creditors to make additional loans and receive in return, not only the principal of the new loan, but also repayment of existing credits in the same amount. Speculators began buying credits in order to participate in this new investment opportunity. Credits of, say, 100 florins, purchased on the open market at 30% of nominal value, would have allowed an investor to make a new loan of 100 florins and to receive, after two years, 200 florins: a 70-florin profit on a 130-florin investment (27% annual return).
Over the next decade, many citizens made such voluntary loans, making handsome profits and allowing the government to reduce total indebtedness from 500,000 florins to 360,000 in 1350, and just 270,000 in 1358.19 The negotiability and devaluation of Monte credits allowed anyone with cash to enter the market, buy shares for a fraction of their nominal value, and receive the full value in return for another loan, also repaid, of equal amount. Speculators who bought credits and made these lucrative loans to the commune came
chiefly from the ranks of the “new men” who came to power in 1343. A major transfer of wealth occurred in Florence in these years as the “new men” managed communal finances to their own benefit and to the detriment of the weakened elite
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Dwarven Blacksmith
Alex Amsterdam
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I would have lived in peace. But my enemies brought me war.
