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History suggests that the Merchant of Venice was set in Venice probably because Venice was a very popular city at the time the play was made. It could also do with the fact that the words Merchant and Venice sound good together.

When looking at Shakespeare's motives for setting the play in Venice, it may help to look at why 'Othello' was also set in Venice...

You may notice in Merchant of Venice how Shakespeare shows Venice as a state divided against itself - for example Christians resent the practice of usury, despite the fact that it is essential to their booming economy. Antonio spits on Shylock one minute, yet is asking for his help the next - Christian society at the time is shown to be ignorant of it's foundations, to the point of resenting them, and is therefore shown to be unstable.

Going back to the question - one reason the play could be set in Venice is so that Shakespeare could present his critical view of the Christian/Monarch situation in England at the time, without attracting censorship of his work by the English government.

Venice may also have been used as it has an element of mystery about it - bear in mind that few had been to exotic places such as Venice at the time, so it would've added an additional layer of mystery to the play.

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