For much of the fourteenth and fifteenth centuries, the medieval city-states of Tuscany - Florence, Pisa and Siena - were at war with each other or with other Italian towns. This was war waged as much by money as by men. Rather than require their own citizens to do the dirty work of fighting, each city hired military contractors (condottieri) who raised armies to annex land and loot treasure from its rivals. Among the condottieri of the 1360s and 1370s one stood head and shoulders above the others. His commanding figure can still be seen on the walls of Florence's Duomo - a painting originally commissioned by a grateful Florentine public as a tribute to his 'incomparable leadership'. Unlikely though it may seem, this master mercenary was an Essex boy born and raised in Sible Hedingham. So skilfully did Sir John Hawkwood wage war on their behalf that the Italians called him Giovanni Acuto, John the Acute. The Castello di Montecchio outside Florence was one of many pieces of real estate the Florentines gave him as a reward for his services. Yet Hawkwood was a mercenary, who was willing to fight for anyone who would pay him, including Milan, Padua, Pisa or the pope. Dazzling frescos in Florence's Palazzo Vecchio show the armies of Pisa and Florence clashing in 1364, at a time when Hawkwood was fighting for Pisa. Fifteen years later, however, he had switched to serve Florence, and spent the rest of his military career in that city's employ. Why? Because Florence was where the money was. The cost of incessant war had plunged Italy's city-states into crisis. Expenditures even in years of peace were running at double tax revenues. To pay the likes of Hawkwood, Florence was drowning in deficits. You can still see in the records of the Tuscan State Archives how the city's debt burden increased a hundredfold from 50,000 florins at the beginning of the fourteenth century to 5 million by 1427. It was literally a mountain of debt - hence its name: the monte commune or communal debt mountain. By the early fifteenth century, borrowed money accounted for nearly 70 per cent of the city's revenue. The 'mountain' was equivalent to more than half the Florentine economy's annual output.
From whom could the Florentines possibly have borrowed such a huge sum? The answer is from themselves. Instead of paying a property tax, wealthier citizens were effectively obliged to lend money to their own city government. In return for these forced loans (prestanze), they received interest. Technically, this was not usury (which, as we have seen, was banned by the Church) since the loans were obligatory; interest payments could therefore be reconciled with canon law as compensation (damnum emergens) for the real or putative costs arising from a compulsory investment. As Hostiensis (or Henry) of Susa put it in around 1270:
If some merchant, who is accustomed to pursue trade and the commerce of fairs, and there profit from, has, out of charity to me, who needs it badly, lent money with which he would have done business, I remain obliged to his interesse [note this early use of the term 'interest'] . . .
A crucial feature of the Florentine system was that such loans could be sold to other citizens if an investor needed ready money; in other words, they were relatively liquid assets, even though the bonds at this time were no more than a few lines in a leatherbound ledger.
In effect, then, Florence turned its citizens into its biggest investors. By the early fourteenth century, two thirds of households had contributed in this way to financing the public debt, though the bulk of subscriptions were accounted for by a few thousand wealthy individuals. The Medici entries in the 'Ruolo delle prestanze' testify not only to the scale of their wealth at this time, but also to the extent of their contributions to the city-state's coffers. One reason that this system worked so well was that they and a few other wealthy families also controlled the city's government and hence its finances. This oligarchical power structure gave the bond market a firm political foundation. Unlike an unaccountable hereditary monarch, who might arbitrarily renege on his promises to pay his creditors, the people who issued the bonds in Florence were in large measure the same people who bought them. Not surprisingly, they therefore had a strong interest in seeing that their interest was paid.
Nevertheless, there was a limit to how many more or less unproductive wars could be waged in this way. The larger the debts of the Italian cities became, the more bonds they had to issue; and the more bonds they issued, the greater the risk that they might default on their commitments. Venice had in fact developed a system of public debt even earlier than Florence, in the late twelfth century. The monte vecchio (Old Mountain) as the consolidated debt was known, played a key role in funding Venice's fourteenth-century wars with Genoa and other rivals. A new mountain of debt arose after the protracted war with the Turks that raged between 1463 and 1479: the monte nuovo. Investors received annual interest of 5 per cent, paid twice yearly from the city's various excise taxes (which were levied on articles of consumption like salt). Like the Florentine prestanze, the Venetian prestiti were forced loans, but with a secondary market which allowed investors to sell their bonds to other investors for cash. In the late fifteenth century, however, a series of Venetian military reverses greatly weakened the market for prestiti. Having stood at 80 (20 per cent below their face value) in 1497, the bonds of the Venetian monte nuovo were worth just 52 by 1500, recovering to 75 by the end of 1502 and then collapsing from 102 to 40 in 1509. At their low points in the years 1509 to 1529, monte vecchio sold at just 3 and monte nuovo at 10.
Now, if you buy a government bond while war is raging you are obviously taking a risk, the risk that the state in question may not pay your interest. On the other hand, remember that the interest is paid on the face value of the bond, so if you can buy a 5 per cent bond at just 10 per cent of its face value you can earn a handsome yield of 50 per cent. In essence, you expect a return proportional to the risk you are prepared to take. At the same time, as we have seen, it is the bond market that sets interest rates for the economy as a whole. If the state has to pay 50 per cent, then even reliable commercial borrowers are likely to pay some kind of war premium. It is no coincidence that the year 1499, when Venice was fighting both on land in Lombardy and at sea against the Ottoman Empire, saw a severe financial crisis as bonds crashed in value and interest rates soared.9 Likewise, the bond market rout of 1509 was a direct result of the defeat of the Venetian armies at Agnadello. The result in each case was the same: business ground to a halt.
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