EW JOURNAL

Florence, the second half of the 1420s. The commune has just opened a fund for dowries, the Monte delle doti, established in 1425 to receive deposits nobody expects to see again for a decade or more, at rates, something in the region of eleven or twelve percent compounded across terms of seven and a half or fifteen years, that were not charity. The commune needed the money. A father walks in and deposits a sum on behalf of a daughter aged five. He will not see the money again. If she reaches the age of marriage and marries, the fund pays her husband a dowry several times what he put in; if she dies first, the deposit is forfeit, or returned in part, depending on the terms of the tranche he chose. What it sold in exchange was a claim contingent on a child’s survival and a wedding, and fathers bought it in numbers, because the alternative was saving at no return against an obligation that would arrive whether or not they had.

That is the shape of every long contract, reduced to one transaction and one family: the present binds a person who does not yet exist in the form that will eventually be required of her.

The instrument has a longer history than Florence. Towns in northern France and Flanders had been selling rentes since the 1220s, annual payments, for a life or in perpetuity, bought with a capital sum, built on the older Carolingian census contract, in which a payment was tied to a piece of productive property instead of to a person. The lawyers were emphatic that this was a purchase, not a loan. What the buyer acquired was not a debt but a stream: he had bought an income, in the way one buys a mill or a fishpond, and it made no difference to the legal form whether that income came from a wheel, a pond, or a town’s excise. Since it was a purchase, the prohibition on usury did not apply. Innocent IV, ruling on the question around 1250 and 1251, agreed, on a condition that decided everything afterwards. The buyer could never demand repayment of his capital.

Disguised inside that condition was a great deal. A perpetual annuity sold at ten times the annual payment yields ten percent, and a town selling at that rate is borrowing at ten percent with no maturity date and no principal ever to repay. The councillors who sold the first tranches were financing walls against a real threat, with the only instrument the church permitted them, at a cost that seemed reasonable against the alternative of a sacked city, and calling them fools requires forgetting what the alternative actually was. The men who sold the twentieth tranche were paying the interest on the first nineteen.

Redemption was settled the wrong way round, and that asymmetry is the whole mechanism. The town normally reserved the right to buy the annuity back at the original price; the holder, by the doctrine that made the contract licit in the first place, had no right to demand anything but his yearly payment. This sounds like an advantage to the borrower and is one, when rates fall and the treasury has cash. It is worthless in every other circumstance, and it meant that when money was needed most and available least, a council could not reduce its obligation by a penny except by buying annuities on the open market at whatever the market asked. The holders, meanwhile, could sell to each other freely, and did, and a secondary market in municipal rentes existed well before anyone thought to call it one, in which the price of a town’s paper was a public statement about what the burghers thought of their own council.

Councils eventually did what councils do. They suspended payments in part, negotiated with the largest holders, converted annuities into others at worse terms, and quarrelled at length about whether an obligation contracted by a previous council in a previous generation bound the present one. The theologians had an answer. The holders had lawyers. The compromise, reached in stages over decades, was that the town paid, but less, and later, and the burghers who had bought an income for their daughters discovered that a purchase can be renegotiated after all when the seller is the same body that appoints the judges.

Faust wanted the world in a lifetime and pledged something he would not miss until the term expired. The annuity did the same thing in reverse and with better paperwork: it pledged nothing the present council would miss at all, because the entire cost fell on councils not yet elected, drawing on an excise not yet collected, from burghers not yet born. Call that the design working exactly as intended, since a perpetual annuity is the purest available form of the transaction in which one generation consumes and another pays, and its perpetuity is precisely what made it cheap to the men who sold it and ruinous to the men who inherited the obligation.

Modern finance has a name for the mismatch, though it usually applies it to something smaller. An instrument with no maturity funds a claim that never amortises, and the borrower’s flexibility depends entirely on who holds the option to end the arrangement. The town held a call it could not afford to exercise. The holders held nothing but a perpetual receipt, which is to say they held the better position in every state of the world in which the town remained solvent, and a worthless one in the state where it did not. Between those two outcomes lies the whole of a municipality’s credit history, and the men who sold the first tranches had priced only the first. What they never priced, because no instrument then existed that could, was the probability that a council a century out would find the payments politically impossible and simply stop.

Florence’s own Monte delle doti priced its version of that risk with unusual candour, because it had to. A dowry fund cannot pretend the future is certain: the whole contract turns on whether a named child lives and marries, and the commune wrote the contingency directly into the terms, not tucked away in a footnote. Fathers understood they were buying a conditional claim. What nobody wrote into any tranche was the condition that mattered most, which was whether the commune itself would honour the schedule when the girls came of age together in a decade of war. Florence, in the event, restructured: terms were extended, payment came in credits instead of coin, and old obligations were converted into new ones.

Aquinas would have found nothing objectionable in the underlying form. The purchase was real, the property behind it was real, the rate was within what custom allowed, and no man was compelled to buy. His successors at Salamanca, who thought harder about the case, were more troubled, and their trouble concerned time far more than it concerned fairness: whether a contract binding a person who does not yet exist can be a contract at all, or whether it is something else that has borrowed the word.

Every long obligation contains a description of a future that has been assumed and never quite examined. The annuities described a town whose excise would grow, whose population would hold, whose councils would honour what earlier councils had signed. Two of those propositions were reasonable and the third was a hope dressed as a legal certainty.

What, then, did the father in 1425 actually buy for his five-year-old? The dowry itself was contingent, and so was any return on it, tied to a commune that might restructure before the term ran. What he actually bought was a description of a Florence that would still be recognisable when she was twenty, and there is no way to know whether he believed it or merely preferred it to the alternative of believing nothing at all.