Debt Crisis, Renaissance Style
Cyprus is in crisis. Anticipating full-scale financial meltdown, hundreds of people have been queuing at cash machines throughout the island all week, hoping to withdraw their savings before it is too late. Banks have shut their doors. Shops are refusing to accept credit cards, and businesses have been crippled by their inability to trade. The economy has all but ground to a halt.
It is the latest instalment in the never-ending saga of European debt crises. Hard-hit by the writedown of Greek bonds and a regional recession, Cyprus’ largest banks are teetering on the edge of collapse and the state, too, is woefully short of cash. The government’s only hope of avoiding the worst is to secure a massive loan from the EU and the IMF by raising €6 billion as quickly as possible. And to do this, it may be forced to raid Cypriot’s bank accounts. The fear engendered by the mere possibility has been contagious – and destructive in the extreme.
Yet while Cyprus may be experiencing the worst of the Eurozone’s woes, neither its debt crisis nor its proposed solution are anything altogether new. Although it may be cold comfort for Cypriots currently clamouring for their money, the idea of solving a national debt problem by targeting private assets was tried on an even bigger scale in fifteenth-century Florence. A quick look at the worst debt crisis of the Renaissance reveals some surprising parallels – and some striking lessons.
The causes of the Florentine debt crisis were admittedly somewhat different. In 1424, war broke out between Florence and its long-standing rival, Milan. Things went badly from the very beginning, and a series of early Tuscan losses dragged the conflict out for longer than anyone had expected. The real danger was, however, financial. Forced to rely on mercenaries, Florence was saddled with enormous costs, far in excess of anything it hope to raise from taxation. By 1426, the city’s deficit stood at 682,000 florins (c.£82 million in terms of gold; c.£270 million measured against wages) and was rising fast.
But even though modern savings accounts did not exist in quite the same form during the Renaissance, the Florentine Signoria’s solution – a new form of property taxation known as the catasto – was pretty much identical to that being considered by the Cypriot government today. From 1427, every household was obliged to declare all their assets. These were then taxed at a rate of 0.5% each time the tax was collected.
On the surface, it looked equitable. Poorer households were often exempted, and the greatest burden fell on the richest. Whereas some owed the equivalent of only a few pounds, the notoriously rich Palla Strozzi’s declared wealth of 101,422fl. meant that he owed 507fl. (c.£61,000 in gold terms/c.£201,000 in labour terms) at each collection.
But because of the scale of the debt crisis, the Signoria announced collections several times a year. In the period 1428-33, the catasto was collected on 152 separate occasions. And because it taxed assets – not income – it became a crippling burden. Entire fortunes were wiped out. Even Palla Strozzi, who had invested everything in land, had to plead for a slight reduction in his assessment in 1431. Little by little, Florence was bleeding itself dry. Business was being hit badly, and the city government still needed more cash to keep its head above water.
This all looks very familiar. But from Cyprus’ perspective, the significance of the Florentine catasto lies in the unforeseen, but disastrous results which followed. However harshly it was collected, the catasto simply couldn’t generate enough cash to keep the city afloat. Lacking alternatives, the Signoria had no choice but to borrow large sums of money from those merchant bankers who had managed to hide their wealth from the tax-man a little more successfully. By the 1430s, the city was borrowing a total of 200,000 fl., the greater part of which came from just ten people connected with the powerful Medici family.
Before long, Florence had become completely dependent on loans from merchant bankers. But most of all, its survival depended on the wealth of one family – the Medici. The government could do nothing without the approval of the wily Cosimo de’ Medici. No matter how much his enemies – Palla Strozzi included – might moan, the financial crisis had allowed him to buy total control of the Signoria. From that point on, as Pope Pius II recorded,
Cosimo was refused nothing…his word was regarded as law. [He was] not so much a citizen as master of his city…he enjoyed every semblance of royal power except a title and a court. (trans. Meserve and Simonetta)
Although the city officially remained a republic for another century, the Medici had become Florence’s de facto rulers. Debt had led the city to sell its independence by accident.
It is for this reason that Florence’s debt crisis should be viewed as a warning for Cyprus. The danger of raiding citizens’ savings or assets is that it only serves to weaken an economy in the long term, and hampers a government’s ability to raise money through taxation in future. If Cyprus bleeds itself dry in the same way as Florence, it may find that it becomes dependent – not on one-off handouts from the EU and the IMF – but on bigger, and more regular loans from those Russian-owned businesses which have the largest and best protected accounts on the island. And if that happens, Cyprus – like Florence – may discover too late that it has bargained away its political independence.