CHAPTER 12

SOWING AND REAPING:MEDIEVAL VENICE AND THE BIRTH OF MODERN FINANCE

Medieval Venetians were greedy, money-grubbing scoundrels.

At least that is what many people believed. In truth, of course, they were no more avaricious than other Europeans. What set them apart was their utter reliance on a system of free-flowing capital. Medieval Europe was a largely agrarian economy. Most Europeans worked the land, either as serfs or peasants. The wealth of Europe’s kings, nobles, and clerics was based above all on cultivation. Land produced the agricultural surpluses necessary to fuel a manor-based economy and funded skilled medieval warriors. Few medieval Europeans consumed goods that were produced more than a few days’ journey from their homes. Most exchanges, therefore, were in kind—a barter system with little or no money involved. Although money came increasingly into use in Europe after the eleventh century, it was found primarily in cities and towns and at fairs. In rural areas, where most of the population lived, the great, leather-bound account books of the manor or monastery still recorded payments in candles, wine, livestock, and beer.

In Venice, where land was scarce, trade was the very heart of the economy. And to trade the vast array of goods that made their way into the markets of Venice, only money would serve. The Venetians were just as earnest about making money as other Europeans were about raising a bountiful crop. As they regularly reminded their neighbors, Venetians did not plow fields, but sailed the seas for their livelihood. So, yes, money indeed held importance in the city of the lagoon. The Venetians spent it, saved it, and eventually minted it. They also found new ways to work with it and to make it work for them—innovations that still shape our world today.

It is difficult for us to imagine a world without money. But that is what Europeans faced in the centuries after the fall of the Roman Empire. Political, economic, and legal uncertainties made the old Roman coins unreliable, so they were quickly abandoned. Money, however, is a crucial tool for ensuring that both sides in a bargain get a square deal. If, for example, someone offers to trade one cow for two pigs, how is one to know if that is a fair transaction? Cows and pigs, after all, are very different beasts. If both, however, are valued according to a third commodity, things become much clearer. So, if a cow was widely recognized as being worth five hides and a pig worth three hides, then the aforesaid offer is clearly a bit light. The owner of the cow needs to offer a bit more. One hide would do it—or something else valued at one hide.

In this example, hides are the currency because they are the means by which different commodities are valued—they allow dissimilar items to be traded easily. Hides do have a utilitarian value. One can use them to produce armor, cover a book, or make a drum. But no one needs ten thousand hides, which a rich man would likely have in any hide-currency economy. In other words, the currency need not be utilitarian in any way. It must simply be something that is generally accepted as a measurement of worth—in just the same way that other weights and measures must be generally accepted or else they are useless. A currency must also be something for which the supply is limited—otherwise, it has no capacity for measurement. A useful currency should also be portable (unlike hides) and durable. Portability allows for the easy transfer of wealth, while durability allows that wealth to be saved. This is crucial, for a durable currency allows a seller to give away his or her goods in exchange for that currency with the sure knowledge that it can be exchanged again at a later date for something of equal worth. It allows a person to amass a great deal of wealth over time—far more than would be possible in a system without money.

Since currencies require widespread acceptance, states are the only entities with the means to produce, enforce, and monitor them. In the pre-modern world states minted coins out of precious metals, thereby guaranteeing a certain weight and fineness for each coin. Someone with a pound of silver would find it very difficult to purchase anything, since merchants would insist on testing the silver content (fineness) and the weight of every piece for every transaction. Instead, it was much easier to deliver that silver to the state mint, where it was used to produce coins of an accepted value. The state, of course, charged a fee for this service, but it was well worth it. Each coin was stamped with the symbols of the state, making clear what sort of coin it was and what state guaranteed its worth. Unlike in the modern world, the value of a pre-modern coin lay in its metal content, not the words or numbers stamped upon it. For that reason, coins of different states could be used in any market in which they were familiar. Indeed, before the twelfth century few European states minted coins at all. Venice did not. Before the twelfth century, Venetians used Byzantine coins (bezants, hyperpers, and others), coins from Muslim states (known as saraceni), or imperial coins from Verona.

Although Charlemagne minted few coins, he nonetheless established in western Europe the basis of a monetary system that was itself based loosely on the old Roman one. The core of the system was the silver coin known as a denarius. Two hundred forty denarii would weigh exactly one Roman pound (libra). Twelve denarii were worth one of the old Roman solidi. The system, then, was simple: 1 libra = 20 solidi = 240 denarii. When European states later produced their own currencies, they continued this system. This is, for example, the famous English system of pounds, shillings, and pence that was used until 1971. Although the system was clear and therefore always used for accounting, it rarely corresponded to the actual coins in use. Only in England did the denarius retain its original content of 1.5 grams of 0.925 fineness silver. Elsewhere, new coins were minted with increasingly less silver content and more copper. This watering-down of the coinage allowed the minting state to enrich itself, but at the cost of price inflation. As soon as merchants learned of the lower quality of the coin, they naturally demanded more of them. Older, higher silver-content coins were then hoarded and often melted down—just as a silver Kennedy half dollar or Washington quarter will today be kept rather than spent. In Continental Europe devaluations of coins had become so common that by the twelfth century most denarii (pennies) were largely copper. Pennies minted in Pavia in the 1160s had only 0.2 grams of silver and those minted in Verona only 0.1 grams! This was only enough silver to give the coin a deceptive shine when it came out of the mint—a shine that would quickly darken with handling. (A silver coin that turned copper red when rubbed was said to “blush with shame.”)

As the Middle Ages progressed, Europe and the Middle East developed a trimetallic monetary system. “Black money” consisted of debased pennies, halfpennies, and other low-value everyday currencies made primarily of copper. “White money” referred to coins with high silver content that kept their shine despite handling. Finally, “yellow money” consisted of high-value gold coins, minted as pure as technically possible. Because gold was (and is) much more valuable than silver, gold coins were used only for very large transactions. Their portability, however, made them useful for Venetian merchants purchasing tons of cargo in faraway ports.

A medieval farming village might not care overly much about the silver content of the few coins that made their way through the small local markets. But for Venice, where commerce and trade were the lifeblood of the community, a sound currency was absolutely critical. Uncertain coin values meant uncertain markets—something no businessman wants. During much of the twelfth century Venetians who engaged in small domestic transactions used the Veronese penny and another small penny of their own, which weighed less than half a gram and had 25 percent silver content. For large commercial transactions they used the coins of the Byzantine Empire or the crusader kingdom of Jerusalem. However, the monetary situation in the Middle Ages shifted as quickly as the political picture. The decline of the crusader kingdom in the 1180s led to the debasement of its currency. By 1187, when Saladin conquered Jerusalem, gold coins minted in the Holy Land were only 68 percent fine. Matters were not much better in the Byzantine Empire. Venetian merchants often stipulated payments in the Byzantine hyperper, a high-value gold coin seven-eighths fine. Because the physical hyperper was relatively rare (like a thousand-dollar bill today), Venetians usually exchanged the aspron trachy, a coin originally worth one-third of a hyperper and composed of 30 percent gold, 60 percent silver, and 10 percent copper. More than any other coin, this was the one most familiar to twelfth-century Venetian merchants. But economic and political problems in Byzantium took their toll on the aspron trachy. By the middle of the twelfth century, Emperor Manuel I Comnenus had debased it sufficiently that it was valued at four rather than three to the hyperper. Subsequent emperors debased it even further so that by 1190 it took six aspron trachy to purchase one hyperper.

These fluctuations in coinage at home and abroad were, of course, destabilizing to Venetian trade. To restore stability, Doge Enrico Dandolo, the famous leader of the Fourth Crusade, ordered the production of an entirely new Venetian currency. This momentous step gave Venice much more control over its economic destiny. Dandolo discontinued production of the old Venetian silver penny and replaced it with two new coins. The first was the low-value bianco, or halfpenny, which weighed about half a gram and had 5 percent silver content. With a cross on one side and a bust of St. Mark on the other, the coin was valued at one-half of a Veronese penny. He also minted a new coin, the quartarolo, or quarter-penny. With virtually no precious metal, this was the first token coin (with no inherent value) minted in Europe since ancient Rome. Like modern coins (which still mimic the copper, silver, and gold colors of the Middle Ages) the quartarolo was meant to be used for very small daily purchases.

Although important domestically, neither of these coins solved the problem of the devalued trade currencies. In dealing with this problem, Enrico Dandolo and his council would make their mark on international currency for more than a century. They issued the grosso, the first high-value coin minted in western Europe in more than five centuries. The grosso weighed about 2.2 grams and had the purest silver content that medieval technology could produce: about 98.5 percent fine. The design of the coin left no question that it was meant to replace Byzantine coins as a medium of international trade. The Byzantine aspron trachy was struck with an emperor and a saint both grasping a cross or a labarum on the front and an enthroned Christ on the back. In clear imitation, Dandolo’s grosso depicted himself and St. Mark grasping the banner of St. Mark on one side with Christ enthroned on the reverse. The grosso established Venice as a major player in European and Mediterranean currency markets. It was followed up in 1284 with the minting of the first Venetian gold coin, the ducat, a high-value currency modeled on the Florentine florin. It was an attempt—ultimately successful—to create a stable commercial currency under the control of the Venetian state. At 24 karats, the Venetian gold ducat was also as pure as the technology allowed. It quickly gained wide acceptance across the Mediterranean and Europe, where it remained a well-respected currency for centuries.

The Venetians’ innovations extended not just to currency but also to the development of new financial “products,” many of which are still in use today. Chief of these was the invention of deposit banking. Scholars still debate whether the first bank appeared in Florence or Venice; in any case, the Venetians were certainly early adopters. Without deposit banking modern economies would be impossible. Banks are not only a means of safeguarding money, but also a method of maintaining a constant and energetic flow of capital within a complex economy. Without deposit banking money that is saved is hidden away and removed from the economy—it does nothing except preserve its original worth. Deposit banking, however, allows saved money to be loaned and invested, thereby producing more wealth. Since the heart of deposit banking is lending, one might imagine that it began with the moneylenders or pawnbrokers of the Middle Ages. It did not. It came, instead, from those whom Christ had chased out of the Temple—the money changers, whose ability to navigate the multiplicity of monies was as vital in the Middle Ages as it was in antiquity.

As the previous pages attest, the medieval currency system was complicated. There were many different coins with values not stamped upon them, but decided by the market. A merchant at a fair or in the Rialto stalls might bring many different coins with him to purchase goods. All of these needed to be evaluated for soundness and then exchanged for a common currency. Traditionally, money changers provided that service, taking a commission on the amounts exchanged, much like modern currency exchanges encountered in airports. If, however, a merchant had a large amount of money and planned to buy many different goods over the course of several days, it was cumbersome to keep exchanging funds for every transaction. Instead, at some point in the eleventh century merchants at Rialto began to deposit all their money with a money changer, who would record the amount in his ledger. When the merchant later made a purchase, he would go back to the money changer and request the amount needed. The money changer would give it to him in the proper currency and mark the debit on his ledger. The merchant would then return to the seller and pay for his goods.

What transformed this convenient practice into deposit banking was its widespread adoption in Venice. As time went on, it became standard practice for merchants to deposit their funds with money changers, and the market sellers did the same. This meant that the money changers had accounts on their books for an increasing number of people. It did not take long before transactions that had previously been done with coin were executed instead on the money changer’s ledger. A buyer and seller with accounts at the same money changer would go together to his table and ask that the purchase price be deducted from the buyer’s account and added to the seller’s account. There was no counting out or weighing of coins necessary. The entire transaction was quick, convenient, and safe. Thus was established the giro system, from girare (to circulate or rotate).

During the eleventh and twelfth centuries that was about as far as the system went. The real potential for economic growth lay in the ability to extend credit to customers by allowing them to overdraw their ledger accounts. Since a great many Venetians, including common citizens, deposited their money, a money changer with many accounts could allow overdrafts provided that all the depositors did not demand their funds returned at the same time. But well into the thirteenth century this sort of activity was still considered to be a betrayal of trust. Some money changers in Venice did extend credit, but only for their best customers and only occasionally. In Florence, the practice was even rarer.

In time, the money changers became so important to commercial transactions that the Venetian government began to regulate them. They clustered together in the Campo San Giacomo di Rialto, the church square in Venice’s busy financial district. Each money changer sat on a bancherius (bench) with a small table on which he kept a ledger, a pen and ink, an assay scale, an abacus, and a bag of coins. After a while these men became known by where they sat—they were the bancherii (benchers)—in other words, bankers. Although their benches and stalls have long since disappeared, the covered archway that protected them and their customers still surrounds the campo. And it is still known today as the Sotoportego del Banco Giro.

In the late thirteenth century Venetian money changers (now bankers) began loaning money more regularly. Before issuing a license, the state required the banker to deposit, with the state, a large sum of money as bond, which would be used to pay off depositors if the bank failed. Because the bonds were invariably less than an active bank’s total liabilities, depositors in a failed bank generally received only a fraction of their money back. It appears that this discrepancy led some bankers to disappear with their deposits, letting the state keep and distribute the much-smaller bond. To deal with this problem, sometime before 1318 the government required that bonds be posted by a third party—someone other than the banker himself. This backer, usually an investor with a close association with the banker, had a clear interest in making certain that the banker obeyed the laws, remained solvent, and stayed put.

Venetian banks offered a variety of other financial services as well. Customers could deposit items of value or sealed bags of coins with a banker—the equivalent of a safe-deposit box—for which the banker charged a fee. By 1300, Venetian bankers also offered conditioned deposits that would be paid back at some point in the future with interest, like modern certificates of deposit. But it was the transfer of funds from one account to another that was used on a daily basis. In Florence, this occurred largely by one party writing a note instructing the banker to transfer funds out of his account and into that of the note’s bearer—in other words, a check. In Venice, though, the easy access to the bankers’ tables at Rialto meant that checks were rarely used. Instead, the two parties would present themselves before the banker and instruct him to make the changes in his account books. The oral nature of most of these transactions struck outsiders as unusual. The German knight and traveler, Arnold von Harff, who visited Venice in the 1490s, noted that “the moneychangers are seated around the square, and they hold the money that merchants consigned to them in order to avoid the counting out of cash. When one merchant pays off another, he gives that person an assignment in bank, so that very little cash passes among the merchants.”

By the sixteenth century, Venetian banks were born and died with much fanfare. The opening of a new bank by a new banker was heralded with parades, food, and revelry as a means to drum up attention and deposits. Once a bank was established, it was closely watched by its depositors, including the Venetian state, which was one of the banks’ largest customers. It did not take much to frighten depositors and, thereby, start a run on the bank. The clearest cue was simply the death of the banker. Even in those cases where investors promised to maintain a bank after its founder’s demise, the fear of losing some or all of one’s deposit invariably led to a run that killed off even the most solvent firm.

The development of deposit banking greatly increased the amount of working capital in Venice, and thereby the overall size and growth of the economy. But it did that only insofar as the deposited funds were loaned out at interest. This posed a problem during the Middle Ages since Christians were generally forbidden to charge interest, which was the sin of usury. Christ had commanded his followers to “love your enemies, and do good, and lend, expecting nothing in return” (Luke 6:35). The Catholic Church, therefore, had repeatedly condemned usury in the proclamations of popes, such as Alexander III; the canons of councils, such as Lateran III in 1179 and Lyons II in 1274; and the writings of theologians, such as St. Thomas Aquinas. Usury featured as a common complaint in medieval sermons as preachers sought to cleanse the faithful of the sin. Before the economic expansion of the twelfth century, most moneylending in Europe was done by Jews, who were obviously not subject to the laws of the Church. In most cases, this took the form of simple pawnbroking, the giving of small loans on the collateral of items of value. Some Jewish moneylenders, however, built very large businesses, lending to major monasteries, lords, and even kings. While profitable, this brought its own dangers. Powerful, debt-ridden lords can be dangerous creatures. In the case of the Jews, there was a strong temptation for a king to expel them and repudiate all obligations to them. That is, in fact, what happened in England in 1290 and in France in 1306.

Venice did not expel the Jews, but neither did it welcome them with open arms. Jews were allowed to live and work in Venetian overseas colonies as well as in the terra firma cities, but the city of Venice itself was a different matter. Before the sixteenth century Venice forbade Jews to live in the city at all, although the state made occasional exceptions. After the War of Chioggia in 1379 the government responded to the need for more credit by allowing Jewish moneylenders to come to Venice, but they were moved to Mestre on the mainland after the crisis had passed. Jews were welcome to come to Venice to do business, but they could remain in the city no more than fifteen days per year and were required to wear a yellow badge or yellow cap. A few Jews managed to get around these laws, particularly highly valued doctors and wealthy merchants.

The Jews returned to live in Venice as a result of another war. In 1509 the armies of the League of Cambrai spread across the Venetian terra firma, causing a flood of refugees to rush for the safety of the lagoon capital. Among them numbered a great many Jews. When the emergency had passed, the Venetian Senate decided to allow the Jews to remain for five years. Its reasoning was simple. The state coffers were empty and the Jews were willing to pay handsomely for the right to lend money and do other business in Venice. Furthermore, Jewish pawnbroking provided a much-needed service for Venice’s poor, who could not afford to have accounts with banks. At first the Jews were free to live wherever they pleased, but this soon led to complaints from clergy as well as parents who discovered their children fraternizing with Jews of their age. Calls for expulsion sounded throughout the city, but the Senate chose a more moderate path. In 1516 the government ordered all Jews to move to a new location on the northern outskirts of Venice, which had formerly been the site of a foundry, or ghetto. Despite the modern connotation, the world’s first ghetto was neither a slum nor a prison, but a prosperous neighborhood in which Venice’s Jews thrived. The buildings—higher than any others in Venice—clustered around the central squares, while the rich synagogues became showplaces. Although moneylending and medicine were the most visible Jewish professions, most Venetian Jews held jobs not unlike those of their Christian neighbors. They were particularly known for their secondhand shops, which stocked exotic merchandise much sought after by high and low alike. But it was the small-scale moneylending that was most important to the Venetian state and ultimately the reason that the Jews were tolerated. As the Senate legislation of 1553 boldly asserted, “This Council has permitted the Jews to dwell in our dominions for the sole purpose of preventing Christians from usurious lending in violation of both the divine and civil laws.”

Northern Europeans, less used to seeing Jews or moneylenders, tended to look on the residents of Venice’s Ghetto with suspicion. One thinks of William Shakespeare’s The Merchant of Venice, written around 1597. The villain of the play, Shylock, is a miserly Jewish moneylender who loans the good-hearted Antonio a large sum of money. When Antonio is unable to repay on time, Shylock demands the agreed-upon pound of flesh as payment. The famous Shylock typecasts not only Venetian Jews but Venice itself. Since the seventeenth century, historians, leaders, and writers have tended to view medieval and early modern Venetians through the beguiling lens of Shylock. Even today medieval Venetians are often described as greedy and conniving merchants seeking profit above all—always quick to demand their pound of flesh. The stereotype is inaccurate, but durable nonetheless.

Pawnbrokers were useful for quick loans, but wealthy and established investors in Renaissance Venice could find better terms at the banks. Although the Catholic Church continued to condemn usury, its definition began shifting in the thirteenth century. Even St. Thomas Aquinas agreed that it was lawful to charge a fee for financial services. Therefore, a bank lender might justify interest on a term loan by identifying it as a fee for collecting the funds, transferring them, or seeing to their repayment. Other theologians maintained that a lender had the right to charge a percentage of the amount loaned in compensation for income that the money might have produced had it been available to the lender for investment. In practice, this meant that reasonable rates of interest could be charged, although long-term rates over 10 percent were generally considered usurious, even in Venice.

Christians were also allowed to receive payment for the use of their money if that money made them partners in a particular enterprise. In other words, if funds were invested in a project and the funds were themselves at some risk, then the investor had the right to receive the fruits of that investment. This was crucial for another of Venice’s financial inventions—the colleganza (a form of partnership).

The colleganza was an innovative solution to an enduring problem. Long-distance shipping was the foundation of Venice’s economy, yet it was an activity that was both expensive and dangerous. A Venetian merchant needed a sound vessel, an experienced crew, and a large amount of money with which to purchase goods in various ports. He must also deal with the uncertainties of the voyage. Sea travel (indeed, all travel) in the Middle Ages was perilous. Storms and dense fog plague the Mediterranean, particularly during the winter months when medieval seamen would remain in port. Shipwrecks were common. Although Venetian state galleys patrolled the Adriatic and later offered convoy protection services along the major trade routes, the risk of piracy never disappeared, and grew even more pronounced during Venice’s wars with other maritime powers.

A commercial voyage, therefore, constituted a major risk. Of course, it also had the potential for great reward. Goods purchased cheaply in the markets of Corinth or Sparta could be sold at extraordinary markups in the stalls of Constantinople, Acre, or Venice. Medieval Venetian merchants, therefore, looked for ways to lessen the risk so that one bad voyage would not wipe them out. In the ancient world, merchants typically took out a “sea loan”—a high-interest loan, usually more than 20 percent, which the merchant would use to fund his voyage. The interest rate was steep because repayment of a sea loan was canceled in the event of shipwreck, piracy, or other cataclysm. Although this allowed merchants to mitigate some risk, it was not a perfect solution. It required that a merchant find a lender with sufficient funds to bankroll a voyage and who was willing to assume significant risk. It also necessitated that the merchant’s net profit on a voyage be at least 20 percent or he would lose money on the venture. Finally, although the sea loan alleviated the risk of lost cargo, it did not cover the loss of the vessel itself.

Because the Venetian economy relied on voyages that were both profitable and plentiful, it is not surprising that new methods of financing those voyages began to appear in medieval Venice and other Italian maritime cities. The Venetian colleganza quickly replaced the sea loan in the eleventh century. There were various versions of the agreement; however, each had certain things in common. In its simplest form, an investor, known as a stans, would fund a particular voyage. The merchant, who usually owned the vessel, was known as the tractans. He promised to use the money of the stans in whatever way seemed best to maximize profits on the voyage. The tractans had a great deal of freedom to assess which foreign ports he would visit, which goods he would purchase, and when he would return home. At the completion of the voyage—usually within one year—a general accounting would be conducted, subtracting all expenses and determining the net profit. The stans would then receive his initial investment back plus three-quarters of the profit. The tractans would take the remaining one-quarter of the profit. In this way, both the investor and the merchant had a vested interest in maximizing profits, rather than just completing a voyage. Merchants were thus no longer required to pay all expenses and turn a 20 percent profit in order to have a voyage break even. Any net profit made the voyage worthwhile.

Obviously, if a voyage produced no profit at all, no one in the colleganza received anything. Unlike with sea loans, however, if the vessel or cargo was lost, the investor did not automatically lose all of his investment. If any funds remained, the expense of the lost vessel was deducted and the remaining money (if any) was returned to the investor. Still, this high level of risk versus return made the colleganza a wager that only the wealthy were willing to take. That changed, however, in the twelfth century when merchants began adapting the colleganza to allow for multiple investors instead of just one. In this way, when a successful voyage returned to Venice, the three-quarters of profit paid to the stans was divided among all the investors according to the amount that they had individually invested. Multiple investors were purchasing shares in a particular voyage, much the way modern investors purchase shares in a corporation.

This single innovation enormously expanded the capital available for overseas trade while diluting the overall risk to investors, who could now diversify their investments rather than staking them on a few high-risk ventures. Venetians could simultaneously invest in a wide array of voyages. If one or two ended badly, others would make up the loss. Doge Ranieri Zeno, for example, held shares in 132 different voyages when he died in 1268. Although these colleganza shares could be sold or traded, they represented a relatively short-term venture, so no market for them developed, as it would for other financial instruments such as municipal bonds. However, the multiplicity of investors in a single voyage significantly lowered the financial bar for participation in this activity. Even Venetians of modest means could purchase a small share in a voyage. These small investments dramatically increased the capital available for underwriting overseas trade.

With all the dangers inherent in medieval commerce it would seem to be a good market for insurance. And it is true that some insurance products were developed in medieval Venice. By the fourteenth century, wealthy investors could be found to insure individual voyages against loss. These were not insurance companies, just groups willing to gamble. A merchant who insured his voyage could much more easily draw investors, since there was no possibility that the investment would not be returned. However, the steep premiums were yet another expense, so profits on insured voyages were usually much lower. In practice, though, few voyages bothered with insurance. Diversification of investments was sufficient for most investors to ensure an overall profit margin. For their part, merchants were generally content to recoup the loss of a vessel or cargo by charging it as an expense against profits.

These various complicated financial innovations required painstaking record keeping. The sole owner of an enterprise can figure out profit and loss on the back of an envelope. However, when there are numerous investors, it is imperative to be able to demonstrate that all are receiving their due. Furthermore, the Venetian government had strict laws regarding what could or could not be shipped, stored, or charged against profits. The need for maintaining clear records of complex transactions led to one of Venice’s most profound financial inventions: double-entry bookkeeping.

While it may not seem exciting, the development of double-entry bookkeeping fundamentally changed business in the West. Indeed, without it, the later Industrial Revolution could not have been sustained, and modern corporations would be unthinkable. The technique was first described by Fra Luca Pacioli, a Franciscan mathematician who lived and taught in Venice between 1465 and 1475. Although he is sometimes credited with its invention, Pacioli insisted that he was merely describing a common practice among Venetian merchants. The foundational concept of this form of record keeping is that all transactions are dual in nature. There is always a credit and always a debit to be recorded, and these two must balance at all times. So, for example, rather than recording a payment received for services rendered, a Venetian merchant would record a movement from cash to revenue.

Double-entry bookkeeping may well have developed precisely to deal with the complexities of the multiple-investor colleganza. Because it records both assets and liabilities and the effect of transactions on them, double-entry bookkeeping allowed merchants to easily calculate profit and loss in otherwise complex systems. Just as importantly, it makes the detection of error or fraud much simpler, since everything must balance every day. (Pacioli himself warned that a merchant must not go to sleep before the day’s accounts were fully balanced.) Thus, when a ship’s captain returned to Venice, his investors and the state need not take his word for how much profit he had obtained. Every penny of every expense or income was accounted for in his ledgers, and auditors were careful to make certain that it all balanced. Even in today’s infinitely more complex corporate systems, embezzlement and theft are still usually detected because the books do not balance.

Double-entry bookkeeping was itself a major reason for the adoption in Europe of something that one can find on this very page—Arabic numerals. Originally developed in India, this system of numerical notation was adopted in Persia and then spread into Arab North Africa, from whence it entered medieval Europe in the eleventh century. However, Arabic numerals, like Arabic letters, were foreign and therefore not understood or adopted by most Europeans. With the low level of mathematical skill required even among Venetian merchants in the twelfth and thirteenth centuries, Roman numerals were sufficient. This changed as business transactions became more complex. Sometime in the fourteenth century Venetian merchants began adopting Arabic numerals for bookkeeping, although they retained Roman numerals for dates and other everyday numbers. The reason was simple: Doing math with Arabic numerals is much easier. Furthermore, the neat columns of Arabic numerals fit logically into those of double-entry bookkeeping.

Where was all this business taking place? Where did Venetian merchant vessels go when they sailed out of the busy lagoon? The answer depends a great deal on the period. Before 1200, Venetian captains steered their ships freely to whatever ports offered the most profit. In general, Venetian merchants left Venice with coins and cloth, hoping to buy silk, alum, or a host of other commodities in the East. The goal was to put into a port with low prices on one commodity and then sail to another where it could be sold at a higher price. More goods would then be loaded aboard in that port and the merchant would repeat the process, always seeking to maximize profit. This required not only a good head for business but also a constant stream of news. The Venetian businessman relied on the gossip of the marketplace as well as letters from friends, family, and partners abroad. His goal was to make as many profitable transactions as possible before returning to Venice at the end of his colleganza period.

This freewheeling way of doing business was greatly moderated in the thirteenth and fourteenth centuries. The collapse of the Byzantine Empire made the waters of the Aegean and eastern Mediterranean far more dangerous—especially during periods of war. To provide safety for Venice’s merchants, the state organized regular convoys to Constantinople, Acre, Cyprus, and occasionally other destinations. War galleys initially protected these fleets of merchant vessels, but in the late thirteenth century the Venetians combined the merchant vessel and the oared galley into one design—the merchant galley. This sizable vessel, with three banks of oars and a large crew of rowers, could carry many tons of cargo and keep to a timetable, even when the winds did not cooperate. In an age before ships’ cannons, a vessel’s primary defense was the number of men on board. The Venetian Senate was charged with producing these vessels and organizing the seasonal convoys so as to maximize profit for Venice’s merchants.

Large convoys usually left the lagoon twice a year for a given destination. They did not just duck into whatever port seemed profitable at the time. Like a locomotive train, they had a specific destination and a schedule to keep, and passengers could embark and disembark along the way. Venetian merchant vessels might join a convoy after its departure and leave before its arrival, taking advantage of the safety and drawing on news reports. The use of convoys did not end independent merchant runs, but it did reduce them significantly. In any case, the changing political situation in the East no longer made the port-hopping merchant model profitable after the mid-thirteenth century. Instead, Venice itself had become the final destination for almost all Venetian voyages leaving Eastern ports. With the decline of Constantinople and the fall of Acre, only Rialto had the trade connections necessary to make it a true clearinghouse of goods. This, of course, was all to the benefit of the Venetians, who reaped great profits and imposed plenty of taxes.

By 1400 Venetian overseas trade had settled into a system that would remain stable for decades. The Senate still organized regular convoys, which made their way to Greece and then sometimes on to Tana, Cyprus, Alexandria, and the wool markets of Flanders. The state still provided merchant galleys, but no longer at state expense. Instead, merchants bid for the right to place their goods aboard these vessels or even to control them outright. Merchants who avoided the convoys and sailed on their own generally headed to Greece for wheat or fish or to the bustling markets of the Black Sea. At Tana, at the mouth of the Don River, Venetian merchants loaded aboard Eastern luxury goods, like silks and spices, or furs, which always brought a solid profit.

Tana was also a good market for slaves—indeed, the word “slave” is itself derived from the Slavic people who were sold in Tana and brought to western Europe. Some of these slaves were sent to Cyprus for agricultural work, although many of them—particularly the young women—ended up in Venice, where they were used as domestic servants, concubines, or both. Like all medieval Europeans, Venetians were uneasy with the concept of slavery. Those who could afford slaves tended to view them as servants who would one day earn their freedom. In the wills of fourteenth-century Venetians, slaves were invariably freed. Indeed, it was customary to leave money for the dowry of female slaves who had been manumitted. Venetians understood well that owning a slave was not conducive to entering heaven, so they were careful to rid themselves of the liability at their death and even to turn it into an opportunity for pious charity. The Venetian government closed public sales of slaves in 1366, although they could still be had for another century via private contract.

Because so many of the profitable trade routes now terminated in Venice, there was no longer a need in the fourteenth century for a traveling merchant sniffing out profitable runs between various ports. This, in turn, led to the rapid decline of the colleganza. Instead, Venetian merchants began doing business without ever leaving home. Informed about prices overseas, they would purchase goods at Rialto and then pay to have them placed aboard vessels heading to a specific destination. The vessel’s captain was no longer a merchant himself, but simply someone providing transportation for a fee. The ship’s scribe carefully recorded the ownership of all goods loaded aboard, producing a document that would later be called a bill of lading. The merchant would then send instructions to his agent in the destination port regarding the collection, warehousing, and sale of the goods that he had sent. He would also order the agent to purchase certain goods in that city and send them back to Venice, where the merchant would receive and sell them. These commission agents usually received a flat 3 percent of everything they bought or sold. Unlike the colleganza merchant, the commission agent did not care whether a transaction made a profit, since he received no share in it. Instead, the commission agent sought to maximize his volume by acquiring a reputation for efficient, fair, and timely execution of all instructions received.

During the Middle Ages, Europeans developed a number of agricultural innovations, such as new plow designs and crop rotation methods, which added to their overall prosperity. In just the same way, the people of Venice, who neither sowed nor did they reap, developed new financial instruments to expand their own wealth. In both cases, the tools of daily life were significantly improved. For Venice, where capitalism grew and flourished, the results were astounding. Freedom and free enterprise had built a wonder nestled in a busy lagoon—the most unlikely of all places.