The rise and decline of civilizations and nations is fascinating history and often contains inspirational lessons. Interest in this topic has grown significantly in the past decade with the publication of several important works by Jared Diamond (2005), Norman Davies (2011), and Daron Acemoglu and James Robinson (2012). This article describes Venice’s rise before 1300, when it grew through international trade to become the richest place in the world, and its subsequent fall after 1300. It is a story of how a maritime republic became a museum – of how the first modern republic emerged from the Middle Ages by adopting the most advanced set of open competitive economic institutions of its times, underpinned by nascent inclusive  political institutions and growth-enhancing institutional innovations, then went on to pull down its shutters and lose its institutional dynamism.

 

Venice was the only significant part of the Italian peninsula that was not conquered by the many barbarian invasions into the region in the fifth to eighth centuries. This placed it in a unique position to take advantage of the stability, greater security and expansion of trade that was getting underway in Europe by the year AD 800. The continent’s economy was recovering from the decline it had suffered as the Roman Empire collapsed, and kings such as Charlemagne were reconstituting strong central political power.

 

Innovative Business Institutions

 

Venice became politically independent in the year 810 and, as a nation of seafarers placed right in the middle of the Mediterranean, it was able to benefit from rising trade between Western Europe and the Eastern Mediterranean. Over the following two centuries, these two factors combined to enrich Venetian merchants, who used their newfound economic muscle to push for institutional change in the political system that would instill greater dynamism into the economy.

 

Long distance sea-borne trade at the time faced challenging problems of contract enforcement. This risky trade required large capital outlays that literally sailed out of sight. To resolve these risks new business forms and legal innovations that supported the mobilization and allocation of capital were developed. One particularly famous innovation was the limited-liability partnership known as the colleganza in Venice and the commenda elsewhere in Europe. It was the direct precursor of the great joint stock companies of a later period. The Islamic partnership contracts used in the sixteenth century stretching from Morocco and Spain to India and Indonesia were also similar to the colleganza.

 

A colleganza involved two partners, a “sedentary” one who stayed in Venice and one who traveled. The sedentary partner put capital into the venture, while the traveling partner accompanied the cargo. Typically, the sedentary partner put in the lion’s share of the capital. Young entrepreneurs who did not have wealth themselves could then get into the trading business by traveling with the merchandise. This was a key channel of upward social mobility as even relatively poor merchants — who had neither capital nor collateral — could engage in long-distance trade. Any losses in the voyage were shared according to the amount of capital the partners had put in. If the voyage made money, profits were shared according to the type of colleganza contract.

 

The widespread involvement of Venetians in trade created a great number of rags to riches stories, but also some riches to rags.

 

Heavy Hand of the Doge

 

Equally important as the trading contracts was the development of a supporting legal and enforcement framework during this period. The Law Merchant was introduced which would in due course become universally accepted as the foundation of modern commercial law. This was a body of principles and regulations applied to commercial transactions and derived from the established customs of merchants and traders rather than the jurisprudence of a particular nation or state. Its use of a court of peers to adjudicate commercial disputes between merchants travelling in distant lands meant that the Law Merchant offered a direct and immediate response to the needs of long distance trade.

 

This economic openness and competition and the rise of new families through trade forced the political system to become more inclusive. Two key dates were 1032, when the de facto hereditary Dogeship came to an end and 1172, when the Venetian parliament was established and became the ultimate source of political legitimacy.

 

Prior to 1032 Venice had been famous for its popular election of a Doge (Chief Magistrate)  by the General Assembly, which was in theory a gathering of all citizens, but in practice was dominated by a core group of powerful families. For the previous two centuries all Doges had been members of just three families. The common perception that Venice was a democracy was nothing but a myth. A hereditary Dogeship was the rule and the Doge had unlimited power. The Doge did not pander to the interests of the merchants and often interfered with their businesses. Conflict broke out from time to time between the Doge’s attempts to pursue his own political interest at the expense of the merchants’ business interests.

 

In 1032, political unrest among the merchants came to a head with the election of a Doge who was a wealthy silk merchant. His election brought an end to the system of hereditary Doges. Doges were banned from appointing their successor and a system of proper elections for Doges was put in place and enforced.

 

In addition, a Ducal Council of two judges was created, whose job was to ensure that the Doge did not acquire absolute power. Containing the power of the Doge helped to protect merchants from arbitrary decisions that affected their interests. Doges were henceforth required to consult with the two judges and abide by judicial decisions even on matters dealing with the Doge’s private affairs. The key driver of this institutional innovation was long-distance trade, through its impact on the greater spread of wealth and power.

 

The economic expansion of Venice, which had created the pressure that led to political change, exploded after 1171, when the Doge was murdered. The councilors and leading merchant families immediately sought to fill the power vacuum. After seven months a new constitution was introduced with an elected parliament called the Great Council, which had the power to elect the Doge. This was to be the ultimate source of political power in Venice from this point on.

 

New Inclusive Political Institutions

 

The Great Council was made up of officeholders of the Venetian state, such as judges, and was dominated by aristocrats.  In addition to these officeholders, a nominating committee, whose four members were chosen by lot from the existing council, nominated one hundred new members to the council each year.  The council also subsequently chose the members of two sub-councils, the Senate and the Council of Forty, which had various legislative and executive tasks.

 

The Great Council’s role regarding the Ducal Council is of particular interest here. Three innovations were introduced: the Great Council chose the Ducal Council, which was expanded from two to six members; it created another council, chosen by lot, to nominate the Doge which, since the choice had to be ratified by the General Assembly, effectively gave the choice of Doge to the council; and it required the new Doge to swear an oath of office that circumscribed ducal power, for example, not to expropriate state property or preside over cases against him. Over time these constraints were continually expanded so that subsequent Doges had to obey magistrates, then have all their decisions approved by the Ducal Council. The Ducal Council also took on the role of ensuring that the Doge obeyed all decisions of the Great Council.

 

This institutional change was followed by a huge expansion of Venetian mercantile and naval power. In 1082 Venice had been granted extensive trade privileges in Constantinople, and a Venetian Quarter was created in that city. It soon housed ten thousand Venetians. The mutually reinforcing effects of open competitive economic and inclusive political institutions were working in tandem.

 

These political reforms led to a further series of institutional innovations. In law, there was the creation of independent magistrates, courts, a court of appeals, and new private contract and bankruptcy laws.  These new institutions allowed the creation of new legal business forms and new types of contracts. There was also rapid financial innovation, and we can see the beginnings of modern banking around this time in Venice. The dynamic moving Venice toward fully open, competitive, and inclusive institutions looked unstoppable.

 

But there was a tension in all this. Economic growth in Venice was accompanied by another process called creative destruction, a concept advanced by Austrian economist Joseph Schumpete. Each new wave of enterprising young men who became rich via the colleganza or other similar economic institutions tended to reduce the profits and economic success of established elites. And they did not just reduce their profits; they also challenged their political power. Thus there was always a temptation, if they could get away with it, for the existing elites sitting in the Great Council to close down the system to these new people. This is precisely what happened and it became the cause of Venice’s fall.

 

Membership of the Great Council was determined each year. At the end of the year, four electors were randomly chosen to nominate a hundred members for the following year, who were automatically selected. On October 3, 1286, a proposal was made to the Great Council that the rules be amended so that nominations had to be confirmed by a majority in the Council of Forty, which was tightly controlled by elite families. This would have given this elite veto power over new nominations to the council, something they previously had not had, but the proposal was defeated. Two days later, though, another proposal was put forth and this time it passed. From then on there would be automatic confirmation of a person if his fathers and grandfathers had served on the council. Otherwise, confirmation by the Ducal Council was required. On October 17 another change in the rules was passed stipulating that the Council of Forty, the Doge, and the Ducal Council must approve an appointment to the Great Council.

 

Great Council Becomes Hereditary

 

The debates and constitutional amendments of 1286 presaged the “Closure” of Venice, known as La Serrata. In February 1297, it was decided that if you had been a member of the Great Council in the previous four years, you received automatic nomination and approval. New nominations now had to be approved by the Council of Forty, but with only twelve votes. After September 11, 1298, current members and their families no longer needed confirmation. The Great Council was now effectively sealed to outsiders, and the initial incumbents had become a hereditary aristocracy. The final stamp on this came in 1315, with the “Gold Book” or Libra d’Oro, which was an official registry of the Venetian nobility.

 

Those outside this nascent nobility did not let their powers erode without a struggle.  Political tensions mounted steadily in Venice between 1297 and 1315. The Great Council partially responded by making itself bigger. In an attempt to co-opt its most vocal opponents, it grew from 450 to 1,500. This expansion was complemented by repression. A police force was introduced for the first time in 1310, and there was a steady growth in domestic coercion, undoubtedly as a way of solidifying the new political order.

 

Having implemented a political Serrata, the Great Council then moved to adopt an economic Serrata. The switch toward exclusive political institutions was now followed by a move toward closed and monopolistic economic institutions. Most important, the use of colleganza contracts, one of the great institutional innovations that had made Venice rich, was banned. This was not surprising: the colleganza benefited new merchants, whom the established elites were trying to exclude. This was another step toward more closed and monopolistic economic institutions.

 

A further development came in 1314 when the Venetian state began to take over and nationalize trade. It organized state galleys to engage in trade and, from 1324 on, began to charge individuals high taxes if they wanted to engage in trade.  Long-distance trade became the preserve of the nobility. This was the beginning of the end of Venetian prosperity. With the main lines of business monopolized by the increasingly narrow elite, the decline was under way.

 

The city’s population changes give a clue of the extent of decline. Venice began expanding economically in the tenth century. By 1050 it had a population of 45,000 people. This increased by more than 50 percent, to 70,000, by 1200. By 1330 the population had again increased by another 50 percent, to 110,000; Venice was then as big as Paris, and probably three times the size of London. But by 1500 the population had slipped to 100,000. Between 1650 and 1800, when the population of Europe rapidly expanded, that of Venice contracted.

 

The Doge Palace’s Secret Chambers

 

Venice appeared to have been on the brink of becoming the world’s first open, competitive, and inclusive society, but it fell to a coup. Political and economic institutions became more closed, monopolistic, and exclusive, and Venice began to experience economic decline. Today the only economy Venice has, apart from a bit of fishing, is tourism. Instead of pioneering trade routes and economic institutions, Venetians make pizza and ice cream and blow colored glass for foreign tourists. The tourists come to see the pre-Serrata wonders of Venice, such as the Doge’s Palace. Venice has gone from being an economic powerhouse to being a museum.

 

When visiting the Doge’s Palace in Venice it is worth considering the two faces of this great medieval trading center, whose wealth was used to build not only beautiful architecture, but also remarkably modern institutions. The Doge’s palace, whose grand Sala Maggiore housed a parliament composed of the rich merchants who monitored and constrained most of the Doge’s activities, is its inclusive face. But climb up to the top floor of the palace and one enters the clandestine rooms of the secret service. With each passing decade after its establishment in 1310, this secret service was used to buttress the powers of an increasingly smaller number of families whose spectacular wealth was fed by international trade. This is its exclusive face.

 

 

References

 

Daron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Crown Business, 2012.

Norman Davies, Vanished Kingdoms: The Rise and Fall of States and Nations, Viking Penguin, 2011.

Jared Diamond, Collapse: How Societies Choose to Fail or Succeed, Viking Penguin, 2005.

Frederic C Lane, Venice: A Maritime Republic, Johns Hopkins University Press, 1973.



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