Government debt and financial markets : exploring pro-cycle effects in Northern Italy during the sixteenth and the seventeenth centuries

The essay proves that during the first decades of the sixteenth century, the principal states of northern Italy (along with other states, leaders in the ‘financial revolution’, both on and off the peninsula) faced the problem of long-term public financing by introducing innovations that notably increased collection of monies and tied financial capital to the state organization. These were – even with some differences – the progressive substitution of the emission of bonds for compulsory loans. These securities were: freely subscribed, their interest was guaranteed by a fixed fiscal source, there was no set time for the return of capital, they were marketable, they could be inherited and exempt from confiscation and taxes. The earmarking of future tax income for interest payment on the bonds issued, connnected to the their transferability, set up a public funded debt, thus long-term arrangements in this form became prevalent. If the governments of Milan, Venice, Turin, Genoa and the Farnese Duchy were pushed in this direction by the extraordinary expansion of their balances due to war costs and the limits of their own fiscal systems, the notable growth of this new form of financing came about because of its acceptance by a large segment of subjects, who found this type of investment suitable to their own needs. In some periods a real push-pull mechanism occurred during which the buyers’ response was very quick. The article provides quantitative data regarding the secular trend and the social distribution of this kind of public debt. At the same time the spread of this genotype of public debt and its tumultuous increase did not seem to cause a sterile drain of private wealth to cover war expenses nor did it have a negative effect on the real economy. We have clues, especially for Lombardy, that this form of long-term public indebtedness, acting in a situation of expansion of circulating currency, did not cause a decrease in productive investments and neither did it bring private capital cost increases; on the contrary it had a pro-cycle effect between the second half of 1500 and 1620 and in the economic reorganization of the second half of the XVIIth century. In fact, in the former the public bonds turned into an attractive collateral for loans and increased the possibilities of private financing, acting as a credit matrix (i.e. it was the guarantee of the stipulation of personal loans, the censi consegnativi) for merchants and entrepreneurs; in the latter, when the economic centre of gravity moved towards a less dynamic agricultural-mercantile equilibrium, the debt allowed the state to sustain the public demand and the upper classes – who had in these securities a good income not subject to taxation – to enjoy a remarkable level of conspicuous consumption (palaces, art, clothing, but also country villas that were efficient agricultural farms). Furthermore, investments in public debt constituted a means of redistribution and strengthening of assets that implicated the subscribers in the decision making processes of their governments and helped to maintain political stability throughout the XVIIth century, as is the case of the Duchy of Milan.