In the year 1255 AD, a prominent Italian businessman named Orlando Bonsignori launched a new venture that he boldly called the Gran Tavola, or “Great Table”.
Despite the name, it wasn’t a medieval furniture shop. Bonsignori came from a family of wealthy bankers who had highly influential political connections across Europe. And Bonsignori’s idea was to create the biggest bank on the continent that would cater specifically to kings, popes, and emperors.
In a way, what Bonsignori created was a sort of proto International Monetary Fund; he took deposits from, and made loans to, governments and rulers all over Europe. And Bonsignori’s Gran Tavola had an especially cozy relationship with the Vatican.
Bonsignori raised money for his bank by using a relatively new legal structure called the compagnia, which came from the Latin companio, which referred to the sharing of bread.
The idea behind a compagnia is that individuals could get together and pool their money into a single enterprise (like Bonsignori’s bank), and they would share the profits of the business in accordance with their capital contributions.
This seems like a pretty basic concept for us today. But in the Middle Ages it was quite innovative.
There was just one problem with the compagnia structure: while the partners all shared in the profits of the business, they also shared in the liability.
This meant that, if the venture failed, investors could actually owe MORE than they originally invested. And that’s exactly what happened with the Gran Tavola.
At first the bank was a smashing success; by the mid 1260s, they had become the exclusive financial partner to the Vatican. And that momentum continued for decades.
But by the mid 1290s, long after Bonsignori had passed away, the bank started having serious problems.
King Philip IV of France, angry that the Gran Tavola had backed some of his rivals, confiscated many of the bank’s assets. The bank also lost its Vatican business, which was a huge financial blow.
Within a few years, the bank was insolvent. It was so short of cash, in fact, that there wasn’t enough money to pay depositors.
But since the bank was structured as a compagnia, the bank’s investors were all personally liable for the shortfall.
This was pretty typical back then; the concept of holding shareholders liable to pay the debts of a business goes back thousands of years to Roman law.
But eventually new legal structures were developed. Governments realized that they needed to encourage business investment in order to stimulate commerce and economic growth. And one of the ways they did that was by formalizing the concept of ‘limited liability’.
The Dutch East India Company was one of the most prominent early examples of this structure; it was established in 1602 as a ‘joint-stock company’, whereby investors contributed capital in exchange for shares in the business. But an investor’s financial risk was limited to the amount contributed.
In other words, if the Dutch East India Company succeeded, the investor would receive his share of the profit. But if the company failed, the investor would only lose, at most, his original investment amount. He could not be held personally liable for the company’s debts.
And for the most part, this is still the way business is done today. Shareholders in Apple are not personally liable for the debts and obligations of the business; their total financial risk is limited to the amount of money they’ve invested… but not a penny more.
What’s interesting, however, is that while you cannot generally be held responsible for the debts of any company in which you’ve invested, you WILL ABSOLUTELY be held responsible for the debts of your government.
And local government is a great example.
Over the weekend I was talking with a friend who wanted my opinion about a couple of places she was thinking about moving to in the United States. She has young children and cares deeply about the quality of schools… so we started reviewing the school districts’ financial statements to get a glimpse of the future.
I was pretty surprised at what I saw.
Granted, I only reviewed a small sample of about a dozen school districts in various states. But each of them is heavily in debt– and these are in generally wealthy suburbs in North Texas, Virginia, Florida, Georgia, etc.
According to their audited financial reports, most of the districts I looked at took on hundreds of millions of dollars in new loans over the past two years because of COVID emergency measures they implemented. And now many districts are under pressure to increase security as well.
This is all financially crippling. Many are losing money or scrambling to come up with new funding sources. Some are considering closing down a few of their schools in order to cut costs. And almost all of them are proposing a tax increase.
This is where the concept of stakeholder liability starts to apply again.
Just like with the Gran Tavola where the shareholders were ultimately responsible for the company’s financial obligations, it’s the local residents who are ultimately on the hook for the school district’s debts.
Sure, a school district’s creditor won’t be able to sue the Jones family on Mulberry Street in order to collect. But citizens are absolutely liable to pay in the form of tax increases and service cuts.
And it’s really the same with all government– state, local, federal, etc. Whenever your politicians screw up and the government is in financial distress, they pass the buck on to the taxpayers.
But unlike a shareholder in a company who has ‘limited liability’, i.e. your financial exposure is limited to the amount of your investment, citizens have no similar limitation when it comes to government.
Your financial liability to your government is infinite. They can tax you and deprive you of services forever. As long as you allow them to do so.
This is one of the biggest reasons why it makes sense to have a Plan B.
Without a Plan B, you have no other option, and you’re stuck with a government that will milk you like a dairy cow for the rest of your life.
Part of a Plan B means having another place to go. You might never need to use it. But, like an insurance policy, there’s no downside in having that option identified well in advance.
It doesn’t necessarily need to be a far away place on a distant continent overseas. But at a minimum, at least think about where you might move if you really needed to.
And I would humbly suggest you think about places that are financially solvent, or where you can be disconnected from the local government’s financial liability.