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Ah, Venice, the famed City of Canals, the haunt of lovers, and of beauty. Well, that's not all it was. The fact is that Venice was one of the most successful states in Europe, with a history of independence spanning over a thousand years. In its heyday, it was powerful enough to stand up to empires much larger than itself, thanks to its centuries-long dominance of trade in the Mediterranean as well as cunning and diplomacy.
According to popular legend, Venice was founded by refugees from the fall of Rome. They fled to the swamps where none of the Barbarian Tribes could get at them and set up a series of small communities that would later be combined into the city of Venice.
Somewhere around 8th century AD, they elected their first doge, or leader, and thus lay the foundations of their republic. By the end of the 10th century, they were renowned far and wide for their acumen as merchants and their expertise in the fields of navigation, ship construction, and naval warfare.
It was also known for its mastery of the the medieval version of cutting edge technology, most famously its glass manufacturing, and for "the Arsenal" - a navy yard which could, on word from the Senate, make hundreds of galleys ready for battle in a few weeks.
Venice grew until it became a small empire manipulating The Crusades to its benefit, most famously at its crowning moment of treachery when it arranged for the sack of Constantinople during the Fourth Crusade. This brought Venice to its height. It was about then that Marco Polo made his famous expedition.
In later times the growth of gigantic Empires like the Ottomans and the Habsburgs forced Venice into a decline, and the discovery of a sea route to China hurt its trade. Venice was able to survive by its cunning and its Navy, which was still feared. However, it slowly declined and developed a reputation more in keeping with modern associations than with war galleys and intrepid merchants. Its final end as an independent state was something of an anticlimax, when Napoleon Bonaparte, while campaigning in Italy, extinguished it as sort of an afterthought. At that time the state of Venice had something of a reputation as a Deadly Decadent Court, though it is hard to tell how much of that was propaganda.
After the Napoleonic Wars Venice became part of the Austro-Hungarian empire. Later it became joined with the new Republic of Italy where it remains to this day.