1When faced with unexpected expenditure or higher than expected costs, political leaders down the ages have had no choice but to resort to taxation or borrowing, or both. Those choices are often constrained by the opportunities available, depending on the level of economic activity and the state of society.

2In the last two centuries of the Middle Ages, towns, the papacy and monarchies gradually acquired a fiscal system, i.e. a set of taxation procedures and collection techniques which were combined to ensure that no source of wealth was left untapped. Taxes, initially occasional and improvised, gradually became regular, the methods of collection being defined at the same time as a financial administration was being organized, and more or less coherent management rules were put in place. Created to meet rising public expenditure, taxes were destined to play a part in supporting or hampering economic development, speeding up or blocking social dynamics, and in the origin of administrative structures.

3At the same time, one of the key features of the finances of many monarchs, princes and towns – the towns of Catalonia, northern and central Italy, Flanders and the Rhine valley – was the escalation of public debt, essentially to finance war (military campaigns, and the construction and maintenance of fortifications).¹ In those towns, debt based on the system of annuities also became widespread in private credit and debt, and took the place of loans at interest. A significant proportion of tax revenues, varying between a third and three-quarters at certain periods, had to be devoted to servicing the debt.² The authorities resorted to credit so regularly that the debt steadily grew larger, so that the municipalities had to take on a bit more debt to pay the interest on existing borrowings. Even though borrowing is politically less risky than taxation, many towns did not establish a public debt and regarded borrowing only as an exceptional levy technique. The same was true of the monarchies for instance; it was not until the reign of the Catholic monarchs at the end of the fifteenth century that the Castilian monarchy issued juros, the first form of consolidated debt.

4This debt burden was interpreted in various ways, as it is today. Some people thought that it stifled urban finances by diverting revenues into the hands of the annuitants and unproductive investment, while others saw it as an instrument for financing such things as infrastructure.

5Towns which established a public debt did not choose debt rather than taxation: there was a logical link between taxes and borrowings.3 Debt consolidation required the establishment of tax revenues to permit the payment of interest and ensure that new loans were granted. The debt did not exhaust meagre resources, but helped to create taxation, to strengthen it and to turn it into something ordinary. Thus, in Catalonia, in 1350–1360, the mass sale of censals and violaris was backed by the imposicions which it perpetuated and made into the cornerstone of the fiscal system. In their turn, management of the debt, the allocation of annuities to specific taxes, and the collection of those taxes created a need for a veritable fiscal and financial bureaucracy, and ultimately contributed to the institutional development of those same towns.

6Taxation or borrowing, or rather taxation and borrowing as, in reality, the sale of annuities, a form of borrowing, must instead be considered a form of taxation alongside taxes on property and taxes on various goods and items.

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7In the modern age, the state continued to derive income from tax revenues and the sale of public debt: the two pillars of government finance. Income from property was less significant, and diminished little by little as the patrimonial state evolved into the fiscal state in a gradual process which began to spread over European borders.⁴ Tax and debt matters, which are amply documented in our archives, were always closely intertwined, so to speak, in a mutual relationship of cause and effect, until well into the eighteenth century.

8Clearly, the ways in which taxation and public debt developed at different times varied from state to state and cannot be rigidly classified. However, it is possible to identify some common features which, as a rule, closely follow the political and territorial consolidation of European states. Most taxation was indirect, its burden falling largely on consumption in the large towns, and was hard to avoid, given that it constituted a network of rights of transit, duties and tolls. Over time the movement towards direct taxation which was generally charged on the profits of trade and to a greater extent on income from property, thanks to increasingly precise records on land ownership, was more prevalent in areas of central and northern Europe, where commerce and production showed more dynamism. Almost everywhere revenue from the town taxes was collected by merchant bankers under contracts of varying duration or by means of a more general ‘tax farming’ contract. In that case, the governments settled for a guaranteed annual revenue, leaving the private financiers to deal with all the risks, problems and methods for collection, although this allowed the financiers the possibility of additional earnings since the collection of taxes brought financial privileges of various kinds. For example, in Rome the award of the contract to collect taxes also included the management of depositerie (cash desks) or funds of public debt instruments and the opportunity to subscribe to new debt issues at prices well below the nominal value, as if to demonstrate once again the close relationship between debt and tax. With the development of the central bureaucracies, the state gradually took back the direct administration of tax collection and began to control and manipulate the rates and levels of tax more dynamically. The significance of this turning point was illustrated not only by a greater flow of funds into the state coffers but by the accompanying gradual reclamation of areas of privilege and exemptions occupied by the aristocracy, the clergy and the dominant elites in general.

9By the same token, public debt clearly followed a similar course to that of the personal power and trust residing in the prince, gradually moving through many controversial stages along the way until it was transformed into servicing the debt of the state. Debt itself is in any case politically neutral and does not provoke any obvious disagreements or hostility. It measures the capacity of the state to respect commitments in terms of interest and capital repayments, using both resources from property and tax revenues and consequently to control the territory, tightly dominating the network of political and economic relationships between the capital city and the surrounding towns.⁵ At the same time debt signals crisis situations. Created as an emergency fund to support war, it can act as a forced and compulsory loan as in the Italian and Dutch towns or as a loan granted by the large family bankers of the great monarchs, the French and above all the Spanish, almost always behind the transfer of state revenue. It is certain that ever more costly wars, requiring massive numbers of soldiers and powerful firearms, cause an indiscriminate rise in debt and, paradoxically, also bring the fighting to a standstill from time to time, when those in power can no longer find the funds to finance the troops. The most obvious development concerned the nationality of the lending bankers, with interest rates tending to remain high. In Spain, as early as the 1550s, 51% of the imperial credit was in Italian hands, compared with 24% with the Germans Welser and Fugger and others, with interest rates fluctuating between 10% and 15%. Philip II hated the dominating presence of the Genovese bankers, but could not do without them, confessing in 1580 that ‘esto de cambio y intereses nunca me ha podido entrar en la cabeza’ (‘I have never been able to understand this question of money changing and interest’). As to the teaching of the Church, in the Catholic countries, the rigid ban on usury was not effective in dealing with public loans. In 1569, the papal bull Cum onus from Pius V had controlled the censo consegnativo (constitutive census), prescribing the notarial deed, and including precisely those tax receipts among the sources considered to be legitimate for the payment of interest. Once again, this shows the close link between debt and tax. Even in trade without credit the old opposition would soon have to give way to a more open-minded and favourable attitude. At the beginning of the seventeenth century, Cardinal Federico Borromeo of Milan commended the wisdom and lawfulness of private investments in public debt. In the small Papal State, which did everything not to find itself in the middle of a war, the debt grew disproportionately, above all after the Reformation when the funds were pouring into the Camera as the pope was creating assets simply by signing handwritten bonds, as noted by the astonished Venetian ambassadors.

10However, while the debt weighed heavily on public finances, it also gave rise to more sophisticated financial choices. Many states were increasing debt rather than using the tool of currency devaluation, which would have had a detrimental impact on domestic prices and international trade.⁶ Sometimes, especially in small regional states or city-states, the debt was also used for civil purposes, such as large town-planning projects, or in order to spread the fiscal debts of the surrounding towns towards the central government. In fact, debt was not always a sign of war or imminent collapse of the public finances. In Milan, under Spanish rule, debt set in train a virtuous circle which made the financing of manufacturing more fluid and thus stimulated the local economy.⁷ Finally, debt led to greater efficiency in public administration, because the confidence of savers/investors was closely linked to the transparency of procedures, the assurance of receiving payment and the fact that securities could be freely transferred. Therefore the debt grew, reaching a ceiling only in relation to the achievable rate of return in the form of interest.

11This gave rise to a lively financial market on which public debt securities were traded. Governments began to keep a watch on trading in Lyon, particularly after the Spanish bankruptcies, followed by that of Antwerp, as a favoured market for the supply of capital. But every bank could supply a secondary market from its own funds, with a network of operations extending throughout Europe, not only in the more active and promising areas.⁸ When the governments were forced to go down the road of consolidation, from the second half of the seventeenth century, interest rates had by that stage fallen to modest levels fluctuating between 5% and 3%. For savers investing in public debt, their concern was no longer whether interest was paid regularly but rather whether the actual value of the securities themselves was stable, as demonstrated by the inflationary spiral and the French crisis of 1720: a further clear example of the way that tax revenues and public debt were inextricably linked.