Classical Greece, Persian Empire, Hellenistic Period, Roman Empire, Italian Renaissance, Venice, Florence and Government Bonds

Posted by PITHOCRATES - January 17th, 2012

History 101

The High Cost of Mercenary Soldiers and a Bloated Bureaucracy brought down the Western Roman Empire

Classical Greece dates back to the 5th century BC.  Lasted about 200 years.  And was the seed for Western Civilization.  Classical Greece was a collection of Greek city-states.  There was no Greek nation-state like the nation of Greece today.  The city-states were independent.  And often waged war against each other.  Especially Sparta and Athens.  Athens is where we see the beginnings of Western Civilization.  Sparta was a city-state of warriors.  While Athens kicked off science, math and democracy, Sparta bred warriors.  And boys trained from an early age.  Or were abandoned to die in the wilderness.

Adjacent to Classical Greece was the great Achaemenid Empire.  The First Persian Empire.  The empire of Cyrus the Great.  Which extended from the eastern Mediterranean all the way to India.  Some of those Greek city-states were on the eastern coast of the Mediterranean.  Did not like Persian rule.  And the Ionians revolted.  Supported by Athens.  The Ionian Revolt (499 BC) was the first in a series of Greco-Persian Wars.  Persia’s Darius the Great was tiring of the Greek’s insolence.  And set out to conquer the Greek mainland.  Only to get turned back at the Battle of Marathon.  His son Xerxes returned to Greece to complete the work his dad started.  King Leonidas of Sparta delayed him at the Battle of Thermopylae for three days.  But he defeated the vastly outnumbered Spartans and marched on to Athens.  Where he sacked the abandoned city.  But he would lose the subsequent Battle of Salamis naval engagement.  Losing his navy.  Forcing Xerxes to retreat.

The Greek city-states united to fight their common enemy.  And won.  With the common enemy defeated, Sparta and Athens returned to fighting each other.  In the Peloponnesian War.  Where Sparta emerged the dominant power.  But the constant fighting weakened and impoverished the region.  Making it ripe for conquest.  And that’s exactly what Phillip of Macedon did.  He conquered the great Greek city-states.  And Phillip’s son, Alexander the Great, succeeded his father and went on to conquer the Persian Empire.  Creating the great Hellenistic Period.  Where the known world became Greek.  Then Alexander died.  And his empire broke up.  Then the Romans rose and pretty much conquered everyone.  And the known world became Romanized.  Built upon a Greek foundation.  Until the western part of that empire fell in 476 AD.  Due in large part to the high cost of mercenary soldiers.  And a bloated bureaucracy.  That was so costly the Romans began to debase their silver coin with lead.  To inflate their currency to help them pay their staggering bills.

In Exchange for these Forced Loans the City-States Promised to Pay Interest

The history of the world is a history of its wars.  People fought to conquer new territory so they could bring riches back to their capital.  Or to defend against someone trying to conquer their territory.  And take their riches.  Taking riches through conquest proved to be a reliable system of public finance.  For the spoils of war financed many a growing empire.  It financed the Roman Empire.  And when they stopped pushing out their borders they lost a huge source of revenue.  Which is when they turned to other means of financing.  Higher taxes.  And inflation.  Which didn’t end well for them.

With the collapse of the Western Roman Empire the world took a step backwards.  And Europe went through the Dark Ages.  To subsistence farming on small manors.  The age of feudalism.  Serfs.  Wealthy landowners.  And, of course, war.  As the Dark Ages drew to a close something happened in Italy.  At the end of the 13th century.  The Italian Renaissance.  And the rise of independent Italian city-states.  Florence.  Siena.  Venice.  Genoa.  Pisa.  Much like the Greek city-states, these Italian city-states were in a state of near constant war with each other.  Expensive wars.  That they farmed out to mercenaries.  To expand their territory.  And, of course, to collect the resulting spoils of war.  These constant wars cost a pretty penny, though.  And built mountains of debt.  Which they turned to an ingenious way of financing.

These Italian city-states could not pay for these wars with taxes alone.  For the cost of these wars was greater than their tax revenue.  Leading to some very large deficits.  Which they financed in a new way.  They forced wealthy people to loan them money.  In exchange for these loans these city-states promised to pay interest.

Renaissance Italy gave us Government Bonds and a new way for a State to Live Beyond its Means

The vehicle they used for these forced loans was the government bond.  Used first by the Italian city-states of Venice and Florence.  Which were very similar to today’s government bonds.  Other than the being forced to buy them part.  The bond had a face value.  An interest payment.  And the bondholders could then buy and sell them on a secondary market.   The market set interest rates then as they do now.  The market determined the likelihood of the city-state being able to pay the interest.  And whether they would be able to redeem their bonds.

When there was excessive outstanding debt and/or war threatening a city-state’s ability to service their debt interest rates rose.  And the face value of existing bonds fell.  Because if the state fell these bonds would become worthless.  When state coffers were full and peace rang out interest rates fell.  And bond prices rose.  Because with a stable state their existing bonds would still be good.  Just like today.  So if you’re into government bonds you can thank Renaissance Italy.  And their wars.  Which gave birth to a whole new way for a state to live beyond its means.

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