Most lovers of freedom and free markets champion the separation of the state (politics and politicians) from a lot of things—church, family, business, education, etc. Perhaps if the Constitution of the United States had expressly forbidden the establishment by the federal government of a national bank, Americans would have been spared the endless mischief of its various iterations in our history.
Maybe if money creation at the Federal Reserve continues to stoke rising price inflation, old debates about separating state and banking will become front-and-center again. I for one certainly hope so.
Meantime, it can be instructive to explore what history offers on the issue of states and banks. Here’s a story you might not know because, unfortunately, it is largely forgotten. It’s a story of separation of state and banking so remarkable and so thorough that it deserves to be dusted off and retold.
The country was the Republic of Genoa, known also as the Ligurian Republic, in what is now northwestern Italy. In the late Middle Ages and before Italian unification in the 19th Century, Genoa was one of the most fascinating of many so-called “maritime republics” that dotted the Mediterranean. Others included Venice, Pisa, Amalfi, Ancona, Gaeta and, across the Adriatic, the incredible Republic of Ragusa.
The Republic of Genoa is very interesting but as a free-market economist and historian, I find a financial institution within its boundaries to be far more so. It was known as the Bank of St. George. Consider this stunning description from James Theodore Bent’s 1881 book, Genoa: How the Republic Rose and Fell:
The Bank of St. George, its constitution, its building, and its history, form one of the most interesting relics of medieval commercial activity…Elsewhere than in Genoa we search in vain for a parallel for the existence of a body of citizens distinct from the government—with their own laws, magistrates, and independent authority—a state within a state, a republic within a republic. All dealings with the government were voluntary on the part of the bank. Over their [the bank’s] deliberations, the Genoese government and senators could exercise no influence, nor could they interfere with their general assemblies without violating the most stringent oaths, and without destroying the very basis of the constitution.
The formal founding of the bank took place in 1407, when it assumed its name and when its status as an independent entity—essentially a state within a state—was established. But for two centuries prior, what became the Bank of St. George was a loose federation of businessmen and creditors who earned great respect among the Genoese people. Indeed, one of them in 1371 bailed out the state and the country with a generous gift. Bent explains the context:
At this time, so great was the distress that the government was reduced to placing taxes on some of the most outrageous things, such as dead bodies, etc. No possession, no industry or traffic, was untaxed; cart-loads of sand and rubbish could not be carted away without a tax; a man could not even sweep snow from his doorstep without paying for it…At this critical moment a worthy man stepped forward to save his country, a name almost lost to history [but] claiming far higher merit as a statesman-patriot than many of those whose lives have called for volumes.
That man was one Francesco Vivaldi, a very successful and wealthy businessman and money lender. Seeing Genoa and its government deep in debt and taxes and on the verge of bankruptcy, Vivaldi donated his bank shares to the public treasury on condition that their value be used to repair the government’s finances and reduce both debt and taxes. It worked. Vivaldi’s donation inspired confidence and similar generosity from others in Genoa.
When the Bank of St. George was formally opened in 1407, it was against the backdrop of public appreciation for what its precursor’s leadership had done for Genoa more than 30 years before, as well as the need once again for somebody to bail out the state. The bank would prove to be the foundation of the next 400 years of Genoese trade, prosperity, and empire. Bent observes,
The government of Genoa always respected the liberties of the bank, and the bank always did its best to assist the government when in pecuniary distress. And whilst the state was convulsed by continued revolutions from within and tyrannies from without, the Bank of St. George…always kept an equal course, never deviated from its paths of justice, grew in riches and credit—in short, was the heart of the Ligurian (Genoese) Republic.
On several occasions when the government of the Republic found itself in dire financial straits, it used its overseas possessions as collateral for loans from the bank. For years, the bank would then govern those territories until the Republic paid its debts.
The bank’s management and lending practices were solid. Bent notes, for instance, that it “would only issue paper for the coin in its actual possession.” Inflation was never a problem while the Bank of St. George existed. To strengthen its independence, it adopted a policy in 1528 that no person who served in the Genoese government could hold any position within the bank.
The Bank of St. George and one of its directors, Benedetto Centurione, set the stage for centuries of economic growth when they recommended in 1447 that European trading partners embrace a gold standard for international transactions.
In 1768, the government of the Republic of Genoa sold its island of Corsica to France. A few months later, a boy named Napoleon Bonaparte was born on the island. If his birth had occurred when Corsica was Genoese, he might never have become a French citizen, let alone the Emperor of France. What an irony that it would be an invading Napoleon who put the Bank of St. George out of business in 1805. To a tyrant who wants to oversee everything, a private bank that won’t give him money is a constant annoyance.
Attesting to the sterling reputation of the Bank of St. George are notable historical figures who most lovers of liberty will recognize.
Thomas Babington Macauley in his History of England referred to it and Holland’s Bank of Amsterdam in these glowing terms:
The immense wealth which was in the keeping of those establishments, the confidence they inspired, the prosperity which they had created, their stability, tried by panics, by wars, by revolutions and found proof against all, were favorite topics. The Bank of Saint George had nearly completed its third century. It had begun to receive deposits and to make loans before Columbus had crossed the Atlantic, before Gama had turned the Cape, when Christian Emperor was reigning at Constantinople, when a Mahomedan Sultan was reigning at Granada, when Florence was a Republic, when Holland obeyed a hereditary prince.
Scottish Enlightenment philosopher David Hume, in his Essays: Moral, Political, and Literary, noted the stark contrast between Genoa’s independent Bank of St. George and the government of Genoa’s Republic:
For while the state was always full of sedition, and tumult, and disorder, the Bank of St. George, which had become a considerable part of the people, was conducted, for several ages, with the utmost integrity and wisdom.
This establishment presents an instance of what in all the republics, either described or imagined by philosophers, has never been thought of: exhibiting within the same community, and among the same citizens, liberty and tyranny, integrity and corruption, justice and injustice. For this establishment preserves in the city many ancient and venerable customs; and should it happen (as in time it easily may) that the [Bank of] San Giorgio should have possession of the whole city, the republic will become more distinguished than that of Venice.
In 2017, the University of Liverpool’s Matteo Salonia authored a small but information-packed volume titled Genoa’s Freedom: Entrepreneurship, Republicanism and the Spanish Atlantic. He attributes the relative freedom of the Republic to the operation of the bank:
Indeed, the Genoese showed a tendency to limit the disruptive effects of both factional strife and unchecked government spending, in order to preserve their dynamic, business-oriented, and pragmatic idea of libertà [liberty]. They achieved this, at least in part, thanks to the creation of the Bank of St. George, a unique association of creditors which soon acquired political, fiscal and diplomatic powers.
The fall of Constantinople to the Ottoman Turks in 1453 sounded alarms across Christian Europe. To the Genoese, it meant loss of lives and property in the area, as well as an imminent threat to the Republic’s eastern Mediterranean and Black Sea colonies. The response of the Genoese may surprise you. As Salonia explains,
In this situation of emergency, facing one of the most dramatic crises in the history of the republic, the Genoese refused to entrust more financial resources or more power to the doge [the top political figure]. The idea of raising an emergency tax or to allow the government to borrow more money never crossed the Genoese people’s minds.
The merchants engaged in the Eastern Mediterranean trade, under the direction of the Bank of St. George which financed those trades, assumed the defense of the threatened Genoese colonies. Quite apart from the government, notes Salonia, they agreed amongst themselves to “guarantee the money necessary for the defense of the colonies and to be in charge of delicate diplomatic relations.”
This remarkable episode is further evidence of a Genoese inclination “to protect the rule of law, to limit the power of the doge, to create financial self-government, and to safeguard economic prosperity.” Perhaps we today underestimate the potency of private initiative in the important area of defense, which is often assumed to be the monopolistic duty of government.
Economist Douglass C. North wrote in The Journal of Economic Perspectives in 1991, “A capital market entails security of property rights over time and will simply not evolve where political rulers can arbitrarily seize assets or radically alter their value.” By imposing limitations on the power of Genoa’s politicians, the Bank effectively secured the conditions for a capital market to flourish.
One result was for Genoa to become one of the most important lenders in Europe and a safe place for even European governments to open accounts and deposit funds. Among the bank’s clients were monarchs Ferdinand and Isabella of Spain, who borrowed from the bank to finance such ventures as the explorations of the most famous of all Genoese, Christopher Columbus.
Shortly before departing on his fourth voyage, Columbus wrote a letter to the Governors of the Bank of St. George. His appreciation for their good work was quite apparent:
Although my body is here my heart is always near you. Our Lord has bestowed on me the greatest favor which He has ever granted anyone except David. The results of my undertaking are already being seen and would shine considerably if the darkness of the government did not conceal them. I shall go again to the Indies in the name of the Holy Trinity and shall soon return. But as I am a mortal, I have ordered my son Don Diego to give you every year, forever, the tenth of all the revenue obtained, in payment of the tax on wheat, wine and other provisions.
The Bank of St. George supervised the finances of the Columbus family for decades into the 16th Century.
Who can recall the name of a single political leader of the Republic of Genoa? One name, Andrea Doria, is remembered by a handful of historians. But the tenure of one even as wise and famous as Doria was but a fleeting moment.
For centuries, the extraordinary influence and prosperity of the tiny Republic of Genoa stemmed not from a political leader but from a well-run private bank and the limitations on the state that it helped to maintain.
And it was a foreign state—that of dictator Napoleon Bonaparte—that snuffed it all out. What a shame!
For additional information, see:
Genoa: How the Republic Rose and Fell by J. Theodore Bent
The Republic of Genoa: The History of the Italian City by Charles River Editors
Institutions by Douglass C. North
The World’s First Modern, Public Bank by Vincent Boland