The Merchants of Venice

Whatever happened to Venice?

Piazza San Marco, by Canaletto. Source: Metropolitan Museum of Art

Venice used to be one of the richest cities in the world. After the fall of the Roman Empire, the world devolved into competing factions. There was no uniform standard of exchange, and no central authority. But trade in spices, grains, cloth, and slaves was booming. By 1330, Venice was as big as Paris, and probably three times the size of London.

One of the keys to Venice’s success was the way they financed trade: the commenda system. A commenda involved two partners, one who stayed in Venice and one who travelled. The one in Venice put up most of the money; the travelling partner accompanied the cargo. This was a way for young entrepreneurs who didn’t have a lot of money to get into the trading business, and provided a powerful route to upward mobility. The system worked well: one partner took financial risk, the other took personal risk in a dangerous business.

The rise of new wealth forced the political system to become more open. The Doge, who governed Venice, was elected by the leading families along with a Ducal Council, whose job was to ensure that the Doge did not become an absolute monarch. The Venetians also established independent magistrates, courts, an appeals process, and new contract and bankruptcy laws. Venice became an imperial power in its own right, sacking Constantinople in 1204. By the time Shakespeare wrote The Merchant of Venice, Venetians had begun to lay the foundations for modern banking and finance.

Grand Canal. Photo: Wolfgang Moroder. Source: Wikipedia

But something happened along the way. By the end of the thirteenth century, the reigning families began to protect their power from the newly rich. They made membership in the ruling councils hereditary, sealed off from outsiders. The established elite banned the use of commenda contracts, and nationalized trade. Instead of growing, the population contracted. Portugal, Spain, and England later became the primary explorers of the New World, while Venice fought with Turkey for dominance of the Eastern Mediterranean.

Now, the economy of Venice is dominated by tourism. Over 30 million visitors come every year to view the city’s former glories. Instead of pioneering new trade routes and financial innovations, Venetians explore new ways to make pizza and ice cream.

Venice is a cautionary tale. Economic progress is not a one-way street. Venice became prosperous because of a set of favorable items: a strategic port, an archipelago not susceptible to attack from the land, and financial and legal institutions that facilitated trade, just when sea-born trade was booming. But they closed off any path to advancement, and enterprising innovators sought their fortunes elsewhere.

Columbus on his way to Spain. Source: Wikipedia

It might have been rational for the leading citizens to protect their power from dilution. But in doing so, they missed out. The penniless Christopher Columbus could have come to Venice for financial support. But he went to Portugal and Spain, instead.

Douglas R. Tengdin, CFA

By | 2017-11-07T07:14:52+00:00 November 7th, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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