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October 30, 2006

The First Capitalist Empire
by Martin Weiss

I am in Venice, the birthplace of modern capitalism.

Casual visitors see only its countless canals and bridges. They marvel at the conspicuous absence of cars. They wonder at the pressing presence of the Adriatic Sea, continually lapping against the city's ancient edifices.

But when I visit Venice, I look beyond the picturesque scenes and see the origins of our modern economy -- the first private corporations, insurance companies and banking conglomerates.

For over 500 years, Venetian traders and bankers dominated European commerce. At their peak, they had more than 3,300 merchant ships and 36,000 merchant marines. They forged long-lasting business relationships throughout the Mediterranean and beyond.

They built the first capitalist empire, and the evidence is everywhere:

Next to St. Mark's Basilica, at the entrance to the Piazza San Marco, stands Palazzo Ducale, an enormous marble palace that was the home of the Doge, chief executive officer of the Venetian Republic, a veritable corporate conglomerate.

Its Gothic arches towering over the water are a vivid testimony to Venice's wealth and prosperity in 14th, 15th and 16th centuries.

The Palazzo Ca' d'Oro, built in the early 15th century and once covered entirely with gold ... the Fondaco dei Turchi, originally built in the 13th century ... or the Scuola Grande di San Rocco, a majestic school made entirely out of marble.

But as evidenced in Rodney Stark's The Victory of Reason, these visually vivid vestiges of the past teach equally vivid lessons for the present:

Lesson #1
Don't Underestimate the
Power of Accurate Numbers
To Help Build Wealth

Venetians invented, or at least greatly perfected, double-entry bookkeeping.

Mathematicians such as Leonardo Fibonacci introduced the Arabic concept of zero to Italian bookkeepers. They taught businessmen how to calculate profit margins, use interest rates and allocate costs.

As a result, Venetian traders were able to spot market trends sooner than virtually any others in the world, act quickly, and profit handsomely -- year after year, century after century.

They witnessed the flow of woolen cloth from Northern Europe through their warehouses and launched Italy's textile industries. They saw opportunities in glass, dyes, crystal, shoes, jewelry, leather, and optical products such as eyeglasses. They built great wealth.

And today, investors armed with accurate numbers can do the same, provided they identify the winning sectors, such as oil, precious metals and other natural resources ... or winning regions of the world, like East and South Asia.

Lesson #2
Corporate Might, Applied Wisely,
Can Enrich You ... But When Applied
Recklessly, Can Bankrupt You.

The Venetians were the first to create modern corporations, run by professional executives, distributing profits to shareholders and rewarding employees based on merit.

Venice's vast international banking conglomerates, such as the Riccardi Company founded in the 1230s, established branches in Rome, Nimes, Bordeaux, Paris, Flanders, London, York and Dublin.

The world had never seen anything like it before. And it made Venetian merchants and investors rich beyond their wildest dreams.

Today, with the Dow making new all-time highs and corporate profits better than expected, investors believe they can do the same, and some will. But to do so will require avoiding companies that have recklessly squandered resources.

Two of America's largest, General Motors and Ford, for example, are on a collision course with bankruptcy. Their credit ratings, downgraded to "junk" many months ago, are now rated at deep-junk levels, signaling grave danger for investors.

And recent hopes -- that lower gasoline prices might bring Detroit some relief -- are beginning to fade, as oil prices hold firmly near the $60 level and threaten to come roaring back.

Lesson #3
Don't Underestimate Risk

Venetian merchants were aware of most, but not all, the dangers of doing business.

Shipping silk and spices in the Mediterranean was subject to attacks by pirates. Natural disasters and wars plagued even the most prudent.

So in an attempt to help offset the risk, by the 14th century, Venice had created syndicates of "underwriters," and the concept of insurance was born.

But there were many risks that even the best insurance could not cover: In 1298 the Genovese destroyed the entire Venetian fleet at Curzola. The Barbary pirates of North Africa harried Venice's merchant vessels until the 1800s. The bubonic plague struck Venice repeatedly for centuries, once wiping out up to 70 percent of the city's population.

Likewise, there are many risks that could catch today's investors by surprise:

• The risk of escalation in the wars now raging in the Middle East and Persian Gulf ...

• The risk of a massive dollar decline in the wake of America's largest trade deficit of all time, and ...

• The risk of bets and debts known as "derivatives." (More on these in a moment).

Lesson #4
The Rise and Fall
Of Banking Empires

Venetians effectively invented modern banking.

They made it possible for merchants and kings to easily transfer money on paper.

They created the equivalent of checking accounts, known as "bills of exchange."

And by the 14th century, over 140 Italian banks, mostly in Venice, financed not only commercial enterprises but even entire kingdoms, often enjoying the protection from tyrants that may have otherwise been tempted to raid their coffers.

Conversely, Italian banks that financed entire empires were vulnerable to national defaults.

For example, the Italian Peruzzi Bank English loaned King Edward 600,000 florins, while the Bardi Bank loaned him 900,000. Suddenly and without warning, King Edward repudiated his debts and both of these powerful global banks went bust.

Similarly, some of today's world banks are also taking huge risks. America's largest, such as JP Morgan Chase, Citibank and Bank of America, have invested heavily in derivatives, the high-risk bets and debts I mentioned a moment ago.

And globally, the total face value of all derivatives is now a mind-boggling $285 trillion.

That's over six times the 2005 output of the entire world economy ($44.4 trillion) ... 23 times the total value of the entire Standard & Poor's 500 Index ($12.3 trillion) ... and 25 times the entire U.S. federal and agency debt ($11.3 trillion).

The risks are incalculable. And if you have not yet taken appropriate steps to protect yourself, I recommend you do so now.

[Editor's note: To learn how this can impact your portfolio, plus what you can do about it, make you don't miss the November issue of my Safe Money Report, which goes to press this coming Friday. Call 800-236-0407 to subscribe.]

Lesson #5
The Consequence of Complacency

While Elisabeth and Anthony peered down from the Rialto Bridge yesterday, I visualized 15th century warehouses packed with goods from Arabia and Turkey.

I heard in my mind's eye the click-click-click of abacuses. And I could almost smell the spices being readied for shipping.

These are memories that are easy to grasp. What's harder to visualize is the single most important lesson from Venice's past -- the consequence of complacency.

Even after Venice passed its peak, its merchants and investors saw only blue skies ahead. They underestimated the growing power of foreign competition. They failed to participate in the new markets opening up in the 16th and 17th centuries with the discovery of the new world and new trade routes to Asia.

They didn't understand the importance of the Spanish awash in gold from South America, England and France settling North America, or the Portuguese making inroads in "the Japans."

Venetian dominance was broken. And by the time Venice woke up to the change, it was too late. The world's first capitalist empire declined, and today all we can see are its glamorous remnants.

Are we destined for a similar fate? It's too soon to say. But it's not too soon for you to prepare for the consequences.

Good luck and God bless!

Martin

Martin Weiss, Ph.D.
Editor, Safe Money Report
support@martinweiss.com

For more information and archived issues, visit http://www.moneyandmarkets.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

Copyright © 2006-2007 by Weiss Research, Inc. All rights reserved.
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