Furies (33 page)

Generally speaking, bankers' account books reveal that their depositors were likely to earn a yearly interest of about 5 percent. The deposits were lent out by the bankers at rates of from 12 to 35 percent, and they could leap to 67 percent. But high interest rates—let it be emphasized—met with strong disapproval everywhere in Europe; they smacked of greed (“usury”) and almost of robbery, and could be seen as illegal. Bankers, therefore, were not forthcoming about profits or inflated rates of interest; and information about these matters is among the most difficult to nail down in research. The profits of sixteenth-century papal bankers are still mostly shrouded in mystery.

On top of interest costs, exchange transactions of the sort that moved capital across the face of Europe long commanded fees in the range of at least 12 percent of the sums to be moved. The armies of Spain, France, and the Empire frequently called for the dispatch of funds in this fashion. At one point in the 1540s, Mary of Hungary, sister to the Emperor Charles V and regent in the Habsburg Netherlands,
had money sent from there to her troops in Germany. The sum was repaid in Flanders with funds from Spain, but the entire transaction involved a double transfer, and 40 percent of the original money lent was lost in the two currency exchanges.

When in 1575, in debt to Genoese bankers, the king of Spain suspended interest payments on loans, the archbishop of Genoa lodged a bitter complaint, claiming that the action would ruin convents, hospitals, poor folk, and other small-time depositors in his diocese. If there was exaggeration in his claim, there was also some truth in it.

Wallenstein, one of the generals of the Thirty Years War, managed to put one hundred thousand soldiers into the field because he was able to borrow huge sums of money from a remarkable banker, Hans de Witte. The Fuggers of Augsburg were the chief bankers of the Habsburg Emperor Charles V, the biggest borrower, debtor, and warlord of the first half of the sixteenth century. Second in this line of distinction was the king of France, Henry II (1547–1559), most of whose funds for war were loans from Italian and French bankers. Charles V left a staggering debt of nearly 30 million ducats, about five or six years of royal revenue. But he was greatly surpassed as a spender by his son, Philip II, king of Spain, whose voracious military needs tethered him to the leading Genoese bankers of the day—the Centurione, Grimaldi, de Negro, and Spinola—and to a debt, when he died in 1598, of 100 million ducats: some nine or ten times his augmented yearly receipts.

THE BANKRUPTCIES OF THE HABSBURG kings of Spain reveal the ways in which leading states paid for war. Nothing in ordinary government spending, such as administration or the household expenses of princes, ever approached the costs of war. In managing war costs, the key measure turned out to be a revolutionary stratagem: the consolidating and funding of public debt, hence deficit financing.

The roots of this procedure were in the thirteenth and early fourteenth centuries, in the fiscal demands of the chronic warfare that nagged at the great merchant republics of Venice, Florence, and
Genoa. Germany's free cities also had recourse to similar measures in the fourteenth century.

Italian city-states were among the first to draw all government debt together, with a view to paying it by converting the debt into bonds. Purchased by citizens and subjects, shares in government debt earned a yearly interest of about 5 percent; and in the early years the principal was often paid back, unless war came along to knock expenses out of control. Now debt soared, and repayment of the capital became more difficult. Taxes, meanwhile, being tied to the debt, went to pay the interest on it, so that even when restitution of the invested capital became more infrequent, the yearly interest on it was paid. Government bonds could thus be turned into annuities, and people with the capital to invest were able to live on the returns. Long-term public debt had thus, at this point, become little more than the sum of government bonds.

Between 1557 and 1662, in the middle of dire fiscal crises, the kings of Spain were driven to acknowledge bankruptcy ten times. The default of 1647 throws light on the key operation that marked these events, while also revealing solutions that were astonishingly modern.

War had driven the royal government to the brink of a financial collapse. Even in the late sixteenth century, the enterprising Philip II, steeped in debt, had been unable at times to pay his servants. In 1647, Philip IV and his council of finance found themselves forced to suspend payment on loans from thirty-three contracting bankers (
asentistas
). The debt amounted to more than 14 million ducats. Now all the revenue which had been streaming out to them as interest on the loans was halted, in spite of the fact that binding contracts linked specific sources of revenue, such as particular taxes, to the loans. The contracts also called for repayment of the principal.

Panic ensued. There was next a general audit, and then negotiations stretching out for nearly eighteen months. The monarchy was “too big to fail,” too important to be allowed to go into an uncontrolled unilateral default, a financial collapse euphemistically known nowadays as “a credit event.” The bankers had too much wealth
invested in Spain's sovereign debt to stand by and do nothing, for in addition to the immense losses for them and the wrecking of their reputations, the failure would have caused a financial meltdown in the great seaport of Genoa, if they had all been Genoese. But as it turned out, only three of the bankers were from Genoa. One was English, one Flemish, and one a Florentine. All the others, twenty-seven of them, were Portuguese New Christians: that is, Portuguese Jews whose families had converted to Christianity in recent times.

Making distinctions, the king's financial counselors worked to cut deals. The Genoese and two of the Portuguese bankers were exempted from the suspension of payments. Special arrangements with others were also made. But the general solution lay in the crown's decision to convert the short-term (“floating”) debt to the bankers into a class of select government bonds (
juros
). Over the next fourteen years, payment on these special
juros
would go to redeem part of the principal. Thereafter, the payment of interest on the remaining bonds would begin. In effect, the short-term loans were converted into long-term debt. That conversion, however, eliminated the heavy payments on the high-interest loans, thereby freeing the mortgaged taxes that had been pinned to those loans. The freed taxes could now be used as collateral for the raising of new short-term loans.

Meanwhile, the special bonds issued to the bankers were meant to earn a yearly interest of 7.15 percent, rather than the flat 5 percent of the ordinary government bonds. The bankers were also given the right to sell their
juros
on the open market. But in this, apparently, they were not very successful. The interest of 7.15 percent was seldom paid. And James Boyajian, the historian of these proceedings, sees wholesale fraud in the affair. Toward the end of the seventeenth century, the heirs of the bankers were still creditors of the crown for princely sums.

Was it the case that the proceedings added up to little more than fraud? Possibly. Yet the solution had a completely modern spin. We speak of “managing” or “restructuring” sovereign debt. Spain's
bankers and ministers did just that: They managed a default. In our day, to manage a default is to convert the original debt into new debt with the same value. The new debt, however, now carries a lower rate of interest, and its maturity is extended over a longer period of time.

AUGSBURG'S TOP BANKERS, THE FUGGERS, lost money in their relations with Charles V, but it must have been a fraction of the profits garnered, over more than thirty years, from the rights that had been made over to them—rights over the silver and copper mines of the Tyrol, and over runs of taxes even in faraway Naples. The banker Hans de Witte committed suicide over his impending losses when his chief debtor, Wallenstein, was dismissed as the supreme commander of the Imperial army. The risk of loss was built into the nature and ventures of big banking, above all in dealings with powerful princes. But it was also the case that the resulting profits were fit for the ransom of kings, and no one knew this better than the bankers themselves.

From the time of his first bankruptcy, in 1557, Philip II of Spain made it clear that financial relations with him could be dodgy. His Genoese bankers saw the revenue that was meant for them—taxes linked to the repayment of their loans—exchanged for the government bonds known as
juros
. The revenue thus released, such as taxes on wine and salt, would then be used to raise new short-term loans of the kind that provided immediate cash and supplies for the Spanish army. Yet this high-handed procedure did not frighten bankers away, nor did the financial crunches of 1560, 1575, and 1596, even when it was claimed that their loans were mired in usury. In canon law they no doubt were. The Genoese clung to the king because they knew that over the longer term the profits to be realized from their ties with him would richly exceed any money lost along the way, or any that might be made from shipping and long-distance trade. More than two hundred years of banking know-how guided their handling of Spain's royal debt: an expertise gleaned from the
Venetians, the Florentines, and their own forbears. They knew about disaster in banking. It had a history. As early as the 1340s, the great Florentine banking houses of the Bardi and Peruzzi had crashed, owing to a run on their deposits: a run set off by rumors connected with the knowledge that they had made a loan of some 1.3 million florins of gold to the king of England, Edward III.

In the late sixteenth century, the reputation of Genoa's bankers was unrivaled. They ran the international financial fairs at Besançon and then Piacenza. Held four times yearly, and peaking at Piacenza in the period from 1579 to 1627, these eight-day affairs served as clearinghouses for Europe's biggest bankers and international merchants. Here they raised “baskets” of money, settled accounts, rolled debt over, and discounted foreign bills of exchange. Typically, in a deal, the main lending house—Centurione, Lomellini, or another—would give its name to the loan transaction and fork out the largest share of the sum to be lent. But other bankers and their capital were also brought into the investment, in order to spread the risk. When the kings of Spain defaulted, the bankers would then be forced to deal with depositors back home. But we need not weep for Genoa's bankers: They flourished on the profits to be made from war. Their arrangements carried privileges not passed on to their depositors, one of the most lucrative being the right to export (and traffic in) specified amounts of bullion, notably silver from the New World. This specie was then profitably exchanged for gold, because silver was much sought after in the Near East. Next, the moneymen from Genoa could also count on the hefty profits from the fees imposed on exchange transactions, such as when they paid out their loans in Antwerp, Brussels, or Vienna. Here, if it was wage money for soldiers, their contacts frequently paid the loans out in kind, in food especially, but also in weapons and other supplies. Such payment also resulted in profit, and this was partly passed on, in the form of lower fees, to the bankers in Madrid.

The heyday of the New Christian Portuguese bankers at the court of Spain spanned the years from 1627 to 1650. Most of the Genoese
banking firms, in 1626–1627, were pushed to one side, more or less suddenly. King Philip IV was straining to cut expenses on loans, and the new breed of men from Portugal made this possible. Relying on far-flung networks of relatives and acquaintances, these men could reach out for more favorable terms to distant Hamburg, Rouen, Amsterdam, Constantinople, Venice, and even Brazil, where Portuguese Jews and other new converts dominated the sugar and slave trades. With these informed contacts, Madrid's New Christians were able to offer the crown better loan terms and lower fees for distant exchange transactions—reason enough to move the king's banking business from the old Genoese houses into new hands.

But if the kings of Spain survived more than a century of warinflicted debt, the like could also bring regime change, particularly in smaller states.

One of the most famous of all Renaissance dynasties, the Medici, owed its origins to war and debt. In the early 1430s, the Republic of Florence, already in grave financial troubles, edged into a war of conquest with the neighboring city-republic of Lucca, plunging Florentines more grievously into debt. The war put a terrifying strain on the collection of income and property taxes, and cast the urban oligarchy into a political crisis. Florence's richest banker, Cosimo de' Medici, now came to be seen as a mainstay for the city. A strong faction gathered around him. Knowing how to deploy his money among leading citizens and supporters, he maneuvered untiringly to increase his personal political power. By working hand and glove with cronies in the city's political councils, he and his followers manipulated elections to government office over the course of a generation (1434–1464), always drawing more and more power around the banker and his family.

Cosimo's direct male descendants then used their inherited wealth and authority to devote themselves to politics full-time, to buy (with cash) princely position in the Church, to abandon banking, to control Florence's chief offices, and to turn the Florentine Republic into
a princely despotism. The most famous of them, Lorenzo the Magnificent (1448–1492), even pilfered large sums from the public till. The ascent of the Medici house and the snuffing out of Florentine republican liberty went back to an insane war with Lucca, to a credit crunch, and to a banker who also turned out to be a ruthless politician.

The heart of Europe's most effective public-finance machines was the consolidated or unified funded debt: a brilliant invention because it facilitated borrowing for war, while also drawing subjects or citizens into supporting the state by investing in it. Henceforth the state would be in debt to the more prosperous parts of its population, individuals as well as corporate groups. In practice, this involved the payment of periodic interest, not the doling out of large sums to redeem or buy back shares in the debt. Now, too, the state could raise short-term loans, issue high-interest bonds for these, and even pay back the principal by pledging particular taxes or rights to the short-term lenders. Specific streams of revenue, such as the excises on meat, salt, grains, or wine, were mortgaged for a year or two. This utilizing of the integrated public debt gave remarkable mobility to the state, as it rushed to employ the newfound cash (or credit) in the fighting of its wars.