The story of Venice from 800 to 1350 is of incredible political and institutional change of a remarkably modern sort, sparked by international trade.
Egalitarian institutions and economic mobility threatened the power of Venice's elites, and they used their wealth and power to choke off competition, ending Venice's dominance.
A new NBER working paper from Diego Puga and Daniel Trefler takes a deep look at the data and history of how it happened.
Venice likely would not have become a center of trade if a series of events had not conspired to make it uniquely independent. It was at first the most Western outpost of Byzantium. After helping defeat Charlemagne in battle, it was granted de facto independence in 814, then full independence in 992.
As a result, it was uniquely free from the political and military pressures of the rest of Europe. Venice was also in the perfect geographic position to benefit from international trade. Midway between Constantinople (the gateway to the East) and Western Europe, it was right on the the route to Europe's population centers
International trade really began to pick up after two specific major events. In 969, Constantinople regained control of Eastern Mediterranean. Later, in 1082, Venice helped stall a Norman invasion of the city. The city was rewarded with duty free access to a variety of Byzantine ports, protection of property rights from Byzantine authorities, and became the first foreign traders to be permitted wharfs and buildings in Constantinople itself.
Institutional change
The most important change caused by the resulting influx of wealth was the end of hereditary absolute monarchy in Venice. The Doge (the Venetian head of state), was popularly elected only in the loosest sense before 1036. The Doges had come from one of three families, had absolute power, and could appoint their own successor.
As merchants became increasingly wealthy and powerful, the Doges became increasingly constrained. In 1036, a wealthy merchant was elected, leading to real elections and explicit limits on Dogal powers.
The massive expansion of Venice's trade after 1082 led to even greater reform. In 1172 the Doge attempted to resolve a hostage crisis in Constantinople, failed, and brought plague back with him. Shortly afterwards, a disgruntled citizen followed Doge Vital II Michele down a side street and murdered him.
In the resulting power vacuum, the merchant class wrote a constitution that dramatically changed the city. By 1192 Doge could do almost nothing without the approval of an elected parliament (The Great Council), it placed power primarily in a group of families that owed their wealth to trade.
This environment allowed for an incredible amount of financial and legal innovation. From the paper:
By the early fourteenth century, financial innovations included: the appearance of limited liability joint stock companies; thick markets for debt (especially bills of exchange); secondary markets for a wide variety of debt, equity and mortgage instruments; bankruptcy laws that distinguished illiquidity from insolvency; double-entry accounting methods; business education (including the use of algebra for currency conversions); deposit banking; and a reliable medium of exchange (the Venetian ducat). All these innovations can be related directly back to the demands of long-distance trade
The motivation behind these innovations was the great risk and reward of long distance trade. A trip to Constantinople and the Eastern Mediterranean could lead to profits of well over one hundred percent.
However, shipwreck and piracy were common, and a weather delay could lead to a merchant entirely missing the market, forcing him to sell at a significant loss. Additionally, huge capital investments were required to finance a ship and its cargo.
This type of trade was absolutely unique, and required institutional innovation as, according to the paper:
(1) It required large amounts of capital relative to most other contemporary private commercial activity such as agriculture or manufacturing. (2) Collateral was problematic because, unlike agriculture or manufacturing, the capital literally sailed out of sight. (3) Since the merchant was out of sight of investors, agency problems abounded (moral hazard and asymmetric information).
The Venetian response was a contract known as the colleganza, one of the first examples of a joint stock company. At its simplest, it was an arrangement between two parties, one an investor, and the second, a traveling merchant. The investor provided goods to the traveling merchant who sailed abroad to sell them, bought new goods with the proceeds, and returned to Venice to sell them. Profits were split in a pre-arranged manner.
The colleganza was so innovative because they limited liability for each partnership and to the joint stock of the partners. It was incredibly important to the history of the city because it allowed poorer merchants to gain access to international trade by taking on risk as traveling partners.
It introduced economic mobility to Venice, and allowed a larger section of the population to access international trade, wealth, and political power. There was no hereditary route to power, it was earned through wealth and commercial prowess.
The paper gives the example of Zaccaria Staganzo, the grandson of a slave, who was successful in trade that his descendants served on several iterations of the ruling Great Council.
These institutions and the mobility they provided let talent rise to the top, and ensconced a series of egalitarian economic institution that allowed Venice become a commercial and maritime power.
It didn't last.
The move to Oligarchy
The wealthiest and most powerful families feared erosion of their status. In 1297, they managed to pass the first of a series of laws (known as the Serrata) that gave control of Great Council elections to a few powerful families.
A series of subsequent votes and laws further ensconced a legally ensconced Venetian nobility that had not existed before. The populace did not take it lying down, there were succession of revolts and protests, culminating in an armed insurrection in 1310 that was nearly successful.
In response, the Great Council was enlarged to co-opt would be revolutionaries, and the state's coercive powers were dramatically increased.
After they consolidated power, the now oligarchs embarked on a campaign of regulation, restriction and rent seeking. They essentially cut off the poor from engaging in long distance trade by limiting the most lucrative routes and goods to a select few, most notably with a 1324 law called the Capitulare Navigantium.
Additionally, they nationalized the Galley fleet. Galleys, because of their speed and small holds, transported the most valuable goods. The Venetian elite auctioned off the services of these fleets to a small group of rich friends, protected them from competitors, and collected huge rents.
This table from the paper perfectly sums up the restrictions:
Over time as political power and wealth grew increasingly concentrated, and the egalitarian institutions that had made Venice so wealthy eroded, the city declined as a maritime and economic power. In 1320, the city was a world leader in banking, but rapidly lost that position as the city closed off.
Formerly a dominant naval power, the city suffered a series of massive defeats in the 14th century, often because the commanders were inexperienced oligarchs, promoted without merit.
It's a lesson worth remembering about the benefits of an open society, and the costs of excessive concentration of political and economic power.
Read the full paper here.
See also: Pictures Documenting Greece's Ruined Economy
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