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Isaac de Pinto, Dutch Sephardic banker and financial theorist
Chancellor Pasquale Paoli’s ambitious plans for enlightened reform and national development immediately ran aground upon a crisis which had been building for decades - the insolvency of the Corsican state. By the time of his death King Federico had succeeded in bringing government revenue up to nearly 140,000 scudi per annum, but expenses had also risen.
[1] The army alone consumed at least half of this sum, while the navy’s costs appear to have fluctuated between 30 and 60 thousand
scudi depending on the activity of the navy’s ships and the maintenance which was undertaken. Even on a “good” year, then, military expenses may have consumed around three quarters of the country’s revenue, leaving little to spare for government salaries, infrastructure, courts, and so on.
That calculation also excludes interest. Even under Federico’s regime the government ran a deficit almost every year, and under Theodore I the state’s income had been considerably lower. In 1778 the new Minister of Finance Don Marco Maria Carli estimated that the kingdom’s debt amounted to nearly 1.2 million scudi. The interest rates on this debt were reasonably favorable, probably no more than five percent overall, thanks in part to Theodore’s own connections and Corsica’s unique relationship with (principally Jewish) international lenders. Even so, at 5% this debt would have required around 60,000 scudi per year in debt service, more than 40% of the government’s overall revenue. That was not an unreasonable figure by the standards of the time; Britain and France routinely spent between a third and half of their revenue on debt service in the 18th century. Minister Carli had reason to be worried, but despite the poverty of the Corsican government in
absolute terms, one could argue that Corsica in 1778 was not facing an immediate crisis. If the government could continue to gradually raise revenue and keep a lid on military spending, there would be no reason to fear default.
Then came the war. Rosy predictions that war with Genoa would “pay for itself” with lucrative seizures of Genoese shipping were not borne out by reality. Over a year of war, the Corsican government racked up around a quarter million scudi in “extraordinary” expenses. Government revenues also fell as trade and fishing were both curtailed during wartime. By the Treaty of Poggio Imperiale, Corsica further agreed to pay another 30,000 scudi to Tuscany for the purchase of Gorgona. In October of 1782, as the Corsican
consulta generale was exuberantly ratifying the treaty, Carli bemoaned that the state debt now stood at 1.6 million scudi. This amounted to about 8.2 million French livres, more than half of the seemingly insurmountable 15 million livre “Monaco Debt” which Corsica had struggled under in the 1750s.
The real problem, however, was that all this “extraordinary” debt had been contracted at much higher interest rates than the Corsican government had been accustomed to. The American War had been an excellent time to wage a war against Genoa
diplomatically speaking, as the great powers were all occupied elsewhere, but it was the absolute worst time
financially. Britain and France were both running massive wartime deficits and borrowing enormous amounts of money to cover them, soaking up all the credit floating around the London and Amsterdam markets. Particularly in wartime, creditors were looking for safety, and Corsica did not seem like a particularly safe bet - certainly not compared to Britain or France. Carli and his associates were only able to finance the war by taking usurious loans, and thus the state’s new debt was far more expensive than its old debt. Corsica was now on the hook for around 100,000 scudi a year in debt service. The state’s long-term debt problem was now a short-term debt problem - given the country’s current financial difficulties and the ongoing dearth of cheap credit, it was a challenge even to find lenders willing to cover the state’s immediate deficits.
Negotiations with Turin offered a temporary reprieve. Foreign Minister Giovan Francesco Cuneo d’Ornano had secured Sardinia’s under-the-table support during the Coral War for, in part, an understanding that Turin would take possession of the southern “
isole intermedie” off the Sardinian coast. The Sardinians had not even waited for the war to end to land a token force on Maddalena. The French, however, had disregarded this seizure and had assigned all the isles to Corsica in the Treaty of Poggio Imperiale. Corsica did not intend to keep them; Cuneo d’Ornano considered these barren rocks to be a liability, as they had little economic value and would always be an obstacle to good relations with Turin. His informal “understanding” with the Sardinians, however, was not public knowledge, and if Corsica were to just hand them over it might seem as though Corsica had been intimidated into handing over hard-won territory for nothing.
In December, Corsican and Sardinian diplomats met at the Palace of Racconigi in Piedmont to formalize their arrangement. The diplomats drew a line down the center of the Strait of Bonifacio and agreed that this would be the permanent boundary between their countries. Most of the intermediate isles, the
Isole della Maddalena, lay south of that line and would be ceded to Sardinia, but Corsica would retain the
Isole di Lavezzi, a cluster of rocky islets best known for being the gravesite of the
Minerva. Sardinia paid 40,000 scudi for this acquisition, which did not put a significant dent in Corsica’s overall debt but did keep the government solvent for a while longer. Apart from territorial matters, the Convention also made allowance for Corsican coral fishermen to continue working in the Maddalenas, established favorable trade terms between the two countries, and included a mutual pledge to work together against the Barbary menace. Most importantly, the agreement established a Corsican infantry regiment in Sardinian service.
Sardinia-Piedmont was a heavily militarized state whose modest population was insufficient for its geopolitical ambitions. Unlike the Genoese, the Sardinians did not consider their native population to be unsoldierly or unreliable; Piedmont’s “national regiments” were arguably the best in the army. Nevertheless, the state maintained several regiments of Swiss, Germans, French, and other foreign soldiers because there simply were not enough Piedmontese to do the job. Every foreigner in arms meant that there was another native citizen who was free to pursue taxable economic activity that benefitted the state. Corsicans had a good reputation as fighters and had fought creditably under the Sardinian flag during the War of the Austrian Succession. All the Corsicans would have to do was furnish the recruits, and Turin would pay the Corsican government one
scudi per month for each man. For one full battalion of 600 men, this meant 7,200
scudi per year, and twice that for a full regiment - not enough to solve the debt crisis on its own, but certainly helpful.
Vittorio Amadeo’s interest in this arrangement was not merely military. While he was not privy to Carli’s account books, he knew that Corsica was a poor state with considerable debt. A subsidy from Turin would be very useful - so useful, in fact, that the Corsican government would be reluctant to part with it. The Corsican regiment would thus be an instrument of influence, a means of ensuring that Corsican policy and Sardinian interests remained aligned. The Corsican government was not ignorant of the link between subsidies and political dependence, and Minister Paoli had initially opposed the proposal; he had argued that Corsica’s young men ought to be helping to build Corsica rather than serving as mercenaries to a foreign government. Yet the financial situation was now so desperate that it was difficult to argue against a new source of revenue, and in truth Corsican soldiers were
already serving in foreign armies. At least this way the Corsican government would get something out of it.
Although imminent disaster was averted by this injection of cash, Minister Carli knew that the crisis had only been briefly postponed. He warned that only radical fiscal solutions would prevent catastrophe, and even then a default of some kind might be inevitable. Ideas included demanding forced loans from the nation’s wealthier citizens, as well as disbanding the entire army save for the Guard Grenadiers and a few squadrons of Royal Dragoons. Yet Corsica simply did not
have many wealthy citizens, and the king resisted inflicting such radical cuts on his recently-victorious forces. The regular companies were cut to a peacetime strength of 70 men (from 105) and the navy sold off the captured
Rubea, but Carli knew this sort of trimming around the edges was not going to be enough.
One of the government’s few creditors who was actually privy to these internal discussions was the newly-ennobled Don Isacco Levi Sonsino, who had access to the ministers of state thanks to the crucial role he had played in facilitating arms purchases for the government during the Coral War. He was not merely a facilitator, however; Sonsino had lent the government a substantial amount of his own money, and thus stood to lose personally if the government defaulted on its debts. Sonsino held a unique position of influence, but he was not the only domestic creditor - merchants, maritime insurers, shipowners, and even middling
proprietari had lent money to the government as both an investment and an act of patriotism.
Sonsino thus approached Carli with a proposal. He suggested that he and other local creditors could incorporate themselves as a joint-stock company and consolidate their outstanding government loans into one loan with a reasonably attractive rate of interest - say, four percent. In exchange, the government would give the company special exemption from any planned default. Creditors might not ordinarily consider unilaterally lowering the interest on their own loans, but if the choice was between a guaranteed 4% rate and a potential
zero percent rate if the government suspended loan payments, some might choose the former. Sonsino further proposed that this company could operate as a bank, attracting investors and depositors whose money could be used to support the government with further loans.
[2]
This was somewhat beyond Minister Carli’s competence. A 63 old lawyer-turned-bureaucrat, Carli was a hard worker and had proven himself to be a skilled accountant. He owed his present position to his impressive record as director of the royal saltworks, which he reorganized and restored to profitability. But Carli had no experience with banking and little familiarity with cutting-edge theories on public debt. He was suspicious of this foreign-born Jewish financier and his ulterior motives, and he resented Sonsino’s attempt to insinuate himself into government affairs. Don Isacco may have unofficially been “the most important man in the war ministry” in the words of Count Innocenzo di Mari, but this was not the war ministry, and Sonsino held no formal government position.
Chancellor Paoli, however, was more favorable. Paoli had spent several years in London as Corsica’s envoy and was a professed admirer of its political and financial system. He had his own qualms about the political power which might be exerted by a private bank holding a substantial share of the government’s debt, but he also desperately wanted a way out of the crisis and a means to raise funds for the capital improvement projects he believed were so vital to the national good. Paoli decided to convene an “emergency” committee to offer recommendations on a state bank and appointed Sonsino to chair it, which gave Don Isacco an actual government position (albeit not a salaried one). This committee went so far as to solicit an opinion from Isaac de Pinto, a Dutch banker and Sephardic Jew who was an influential theorist and writer on banking and finance. Pinto, who was well-regarded in London and served as an informal advisor to the government there, was happy to offer his musings on the proper role of a bank in Corsica and endorsed Paoli's plan, although his confidence was not so great as to prompt him to
personally invest in it.
Although a charter was drawn up in April of 1783, the bank’s launch was stymied because of a lack of capital. Its largest “asset” would be the money owed to it by the government, but while this capital did generate income (in the form of interest) further capitalization was necessary for it to perform its basic functions and to issue new loans to the government. The idea of issuing bonds or consols was discussed, but it was unclear who would buy them; there was not much un-invested capital circulating around in Corsica and foreign investors would be difficult to find. It was King Theodore II himself who came to the bank’s rescue, offering to invest £5,000 of his own money (nearly 23,000 scudi) - a relatively safe investment for the king, as he did not have to worry about the government defaulting on its obligations to him because he himself controlled the government. This not only provided the bank with some startup capital (albeit quite meager by the standards of national banks) but some sense of legitimacy and safety, and on June 20th the
Banco Reale d’Ajaccio was formally incorporated and held its inaugural shareholders’ meeting at the Lumbroso coffeehouse.
[3]
The charter of the Royal Bank of Ajaccio allowed it to act like an ordinary bank in most respects - it could receive deposits, offer loans, and hold funds in escrow (indeed, it was granted a monopoly on escrow deposits in the kingdom). Yet it also had aspects of a “national bank” - it was intended to furnish the government with further loans (at a rate not exceeding 4%) and the government was obligated to hold its own deposits with the bank. The bank would publicly sell shares which anyone could buy, even foreigners, but only shares owned by Corsican subjects would be considered voting shares. The king himself owned around a quarter of these voting shares. Shareholders would elect a board of directors, and the bank would be managed by a “governor” who would be nominated by the Council of Finance but would have to be approved by these directors.
Despite Paoli’s hopes for this new approach to finance, the formation of the bank did not allow the government to avoid default. The kind of cuts that were necessary, including a wholesale gutting of the military, simply were not compatible with the “dignity of the state” and the king would not accept them. In June, Carli declared the government to be insolvent and announced a suspension of all interest payments on most of its debt for a period of two years (the Bank of Ajaccio excepted). Officially Carli blamed the American War, which had damaged Corsican trade because of the enforced exclusion of British ships (and the increased activity of Barbary corsairs) and had decreased the availability of credit. This was true, but these factors were rather minor in the overall scheme of things. Whatever Carli’s rationalizations, the suspension was a serious blow to the country’s financial reputation.
[A]
Carli tried to encourage creditors to incorporate with the Royal Bank of Ajaccio, essentially transferring the government’s debt to them to the bank in exchange for an equivalent amount of bank shares - an action which would lower their expected interest but meant they would get at least
some interest in the next two years. Most foreign lenders, however, saw this for what it was - an attempt to intimidate them into renegotiating their loans at lower rates by cutting off interest payments. There was little confidence in the bank despite its royal imprimatur. Sonsino, now seated on the board of directors, worked his connections to Jewish lenders in Livorno and Amsterdam as best he could, but Corsica’s goodwill with the Jewish community did not mean that lenders were willing to take a leap of faith on such an uncertain investment. By the end of 1783 the bank’s assets were estimated at around a relatively meagre 150,000 scudi, nearly three quarters of which were loans to the government, comprising less than 7% of the national debt. Paoli's hope that the bank could be used as an instrument to settle the state's high-interest loans and consolidate its debt in a domestically-controlled institution had foundered on the basic problem that there was simply not very much capital in Corsica - all the kingdom's wealthiest citizens combined could not provide the bank with the capital it needed to step into this role.
Footnotes
[1] All mentions of scudi in this chapter refer to the Corsican
scudo d’argento, which was officially adopted as the government’s unit of account in 1774.
[2] This sort of structure was not unprecedented in Corsica. There were some businesses who operated on a joint-stock model - particularly maritime lenders, as they needed to front a lot of money to fishermen and merchants assembling an expedition (and might charge as much as 18% interest for the service). Maritime lenders and insurers were prominent among the original bank shareholders, so much so that they ensured that the bank’s charter explicitly banned it from making maritime loans so the bank would not become their competitor. Unlike the bank, shares in these interests were not publicly traded - they were, in modern parlance, “closely held” corporations.
[3] The Lumbroso family was a wealthy and prominent clan of Italo-Tunisian Jews (
grana) whose members in the 18th century included a chief rabbi of Tunis and the bey’s personal doctor. The mid-century unrest in Tunis pushed many of its members to flee abroad, and one scion of the family, Samuel Lumbroso, established himself in Ajaccio and opened Corsica’s first coffeehouse. The
Casa Lumbroso became an important center of news and business and was a favored gathering spot for the Constitutional Society in Ajaccio, and thus became a key center of the Enlightenment in Corsica - especially appropriate given that
Lumbroso means “bright” or “luminous” in Spanish.
Timeline Notes
[A] Suspension was the most mild form of default and was the first choice of most countries when they found themselves unable to meet their obligations. France suspended payment on certain debt payments several times during the 18th century, and the new American republic defaulted on interest payments to France in 1785 and 1787. This isn’t a great sign for Corsica, but they’re in good company.
