Today, money is super easy to use in part because the money itself has no value. It’s just paper and copper or nickel. For most of human history, including Venetian history, money had intrinsic value and this made transactions very annoying. Merchants had to be experts in weighing and measuring gold and silver, they had to understand alloys, and they had to carry around apparatus for doing these tests, and they had to perform them at every transaction. In fact, assessing the value and worth of money was such an art that a whole industry cropped around this area of expertise: they were the moneychangers. They would take a look at what you got and let you know what you could get with it. They could also change what you had into something that might be locally more acceptable. In Venice, many merchants were also moneychangers as a side business.
Most cities had moneychangers, but the Venetians took it further. They started to leave their money with the moneychanger and only come back and get some when they needed it, thus inventing deposit banking (they beat Florence to it). The Venetians did not know it at the time, but deposit banking, when you do not need returned the exact same gold and silver you put in, is very important, and continues being important, for economic progress as it keeps capital working in the economy. Instead of thousands of dollars sitting under your mattress doing nothing, it is funding an expedition or something.
Then the Venetians found it much more convenient to settle transactions by what I am calling the mediaeval debit card, that is simply walking up the moneychanger with your business associate and say, “take 94 duckets out of my account and give it to him.” In fact, since many of them knew each other so well, they started just to write out their agreements on slips of paper and giving them to each other (checks). In these two ways they invented moneyless transactions where nothing changed hands. Instead, a moneychanger scribbled something in his ledger and that was that. By the way, the main bench on which the Venice’s moneychangers sat was called the “Banka,” which of course gave us the word “bank.”
Being part of the mediaeval Catholic world, Venetians were not allowed to charge each other interest on loans. This is a problem for merchants, as they need large loans with which to start buying low. Therefore, merchants would look for investors who would front the money. In other parts of the world, investors expected 20% interest on their loans regardless of profit. In Venice, investors expected a large portion of profits only, usually 75%. Of course, it’s not smart to put all your money into one basket, so these investors started diversifying by putting some money in a bunch of different trading expeditions. In other words, they bought and sold shares. Stocks and the stock market started with Venetian merchant shipping. One wealthy merchant died in the 15th century with shares in 132 different voyages.
The Venetians made many other important advancements in finance, including how to regulate banks by requiring them to keep a certain percentage of their money in reserve. They also invented double entry bookkeeping, wherein they record all expenditures and revenue, requiring books to be constantly balanced. You can see how this would make business more fraud resistant. Without this type of bookkeeping, modern finance would be impossible. Complex businesses would not work. Double entry bookkeeping also works best with arabic numerals, and the Venetians were one of the first Europeans to import them. Finally, they started selling liability insurance for merchants, a first since ancient times.
I was very much suprised to find Venice’s ongoing legacy in the world of finance. The history of the city has been fascinating to study. But I’m moving on now. I am currently reading a book about Ayn Rand called Ayn Rand and the World She Made by Anne C. Heller. Heller’s approach is very even, both praising and criticizing. I tried to read Atlas Shrugged a few months ago and found it yawn inducing. This is better. It’s history, biography, and I get all the ideas without having to wade through her fiction (or non-fiction for that matter).