What follows is Part (1) of a series on European bonds.
For my own reading pleasure o cos, doubt anyone else wld be so bo liao
as to read this.
There r those who lament tt they cant find anything to do at home.
For me, it seems as if there's a never-ending stream of things to do.
For instance, I was re-reading parts of The Ascent of Money just.
And the parts abt Venetian bonds truly fascinated me.
So I went to do a Google and was directed to this 20 page article on JSTOR.
Turns out to be a fascinating read.
From the book
Venice had their monte vecchio (old mountain) bonds
and their monte nuovo (new mountain) bonds.
The latter was used to finance wars with the Ottoman Turks.
Possibly the first bonds to be publicly traded on a secondary exchange.
Venetian monte nuvo (par value 100) paid interest of 5 percent.
Lets look at the rollercoaster prices :
1497 - 80
1500 - 52 (see a.)
1502 - 75
1509 - 102
1509 - 40 (see b.)
(a.) Venice fighting a war on two fronts.
(b.) Defeat of Venetian armies at Agnadello, interest payments suspended.
From JSTOR article - Venetian Bankers, 1496 - 1533
In 1498 - 1 out of 30 in Venice had bank accounts,
including young maidens who stashed their dowry or citizens
who placed their savings. They lost it all when banks shuttered.
The Loan-to-Deposit ratios at the Lippomani Bank (c. arnd 1480)
was a mere 15%. The rest of the assets were stuff like
jewels, real - estate, merchandise, government bonds, government credit etc.
In today's banking parlance their risk-adjusted capital adequacy ratios
wld be sky high.
Yet they and other banks still went bankrupt. 3 main reasons for this:
(1) Becos the "assets" weren't really assets of the bank, but those
due from the bankers (the concept of LLC, corporation wasn't exactly
clearly drawn out).
When times are good, bankers share the banks profits and everyone is happy.
When times are bad, and bankers are called upon to assume the bank's liabilities,
most of them simply tried to siam.
Clear conflict of interest here.
(2) Advances to governments which defaulted.
In Venetian banks tho, the percentage of this was relatively small.
But in other banks, such as those of Florence, there were many cases where supposedly
safe government credit turned into bad loans.
(3) Roller-coaster prices of Venetian bonds.
This was e part covered in the book.
Due to a huge increase state spending (G), excessive amts
of bonds were issued to cover the deficit. Note that these bonds
were more like a forced loan where citizens had no choice but to subscribe.
Those who didn't had their property confiscated.
Some ppl did not have enuff ready $$$ to pay for these new issues.
So they sold their old bonds to buy new ones.
In aggregate, this drove down the prices of bonds as a whole.
Besides bank failue, the article mentions the distinction bet.
Monte vecchio and Monte nuovo.
The latter were issued when MV depreciated so much in value
tt nobody wanted them anymore.
Reminds of Weimar Germany replacing Marks with Retenmarks.
Note also the outbreak of war, tho common in Venetian times,
had adverse financial consequences. For instance, the combination of forced loans,
higher i/r due to depressed bond prices
piling up of confiscated hard property which nobody bought
all lead to falling asset values and deflation (sounds abt like the credit
crisis of 2008).
The paper itself accounts such deflation for the 1499 recession
(yes they had recessions back then).
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