Extract from: Carlo M. Cipolla, Before the Industrial Revolution: European Society and Economy 1000-1700, Chapter 7.
ENTERPRISE AND CREDIT
Progress in organization and business was an essential component of technological advancement. The Société du Bazacle, a stock company formed in the twelfth century in Toulouse for the operation of the mills on the Garonne River, illustrates the close relationship between developments in mechanics and in organization.
From the eleventh century onward there was remarkable development in business techniques. The list of innovations is long: one need only consider the organization of the fairs, the appearance and spread of trading manuals, the evolution of new techniques of accounting, the check, the endorsement, insurance, and so on. [1] From the eleventh to the sixteenth century Italy was the birthplace of most of these innovations. Even the monks took an interest in business: Father Luca Pacioli sent to press in 1494 a famous treatise on accounting, and Father Bernardino da Feltre thought up and organized the Monti di Pietà, later to become important credit institutions. After the middle of the sixteenth century, the Dutch and the English took over and further developed business techniques with the establishment of the great trading companies, the first joint stock companies, the stock exchange, and the Central Bank.
I shall not discuss all these innovations in detail, not because they are unimportant, but to avoid boring the reader. I will examine instead the importance of just some of them, especially in regard to saving. In Europe from the fifth to the eleventh century there were practically no financial mechanisms to facilitate the transformation of saving into investment. Those who saved either invested directly or hoarded, and most loans were for consumption purposes. The economy thus suffered from the deflationary effects of hoarding and from a lack of productive investment. With the growth of cities, credit developed very rapidly in the shape of deferred payments for goods sold—sale credit—which boosted consumption as well as investment (especially with the formation of stocks of raw materials and merchants’ inventories). [2] However, a whole series of more sophisticated innovations were introduced to make it easier both to save and to transform saving into productive investment. A typical example is the introduction in the tenth century and the subsequent spread of the contratto di commenda.
In the commenda, known in Venice as the collegantia, gave Dick a sum which Dick then used in business, usually in foreign trade. When Dick came back from his business trip he gave an account of the results to Tom. If there were losses, these were charged against. If there was profit, three-quarters went to and one-quarter to Dick. If Dick had also contributed part of the capital, the profits were divided according to the proportions of capital put up. While Dick was traveling and doing business, Tom stayed at home and did not concern himself with business until Dick’s return. Moreover, Tom was not responsible for what Dick did. For every business trip Dick could also collect cash funds from other investors, entering into new relationships similar to that which he had with The more partners he found the more he could increase his business turnover and, therefore, the greater the potential for profit, which was reaped not only by him but also by his partners.
Jurists have discussed at length whether the commenda was a form of partnership or rather a kind of loan. These questions are of no interest here. More interesting are the consequences of the spread of such contracts. To understand these, it is worth examining the environment in which such contracts were drawn up.
Picture a maritime city of the twelfth, thirteenth, or fourteenth century. When the season is set fair the merchants prepare for a voyage. They need financial means to buy the goods which they will try to sell in far-off markets, and they need other financial means to use abroad, combined with revenue from their sales, to buy goods to bring back home. There is, therefore, a strong demand for liquid funds. Generally the merchants have their own funds available, but if they manage to increase their liquid assets they can increase the volume of their business, with obvious advantages; moreover, if they manage to involve other individuals in the enterprise, they can spread the risks. At this point the merchants advertise their business trip. In the square, or near the harbor, there are notaries. Anyone who holds savings and does not want to leave them lying under the bed can contact the merchants and draw up a contratto di commenda. The important point to make about this arrangement is that it enabled not only institutional dealers but also ordinary members of society—with cash funds—to play a role in the process of production. In a number of respects the spread of the commenda had the same effects as the establishment of a stock exchange. Small as well as large savings could be put to use—the few shillings of the widow and the craftsman as well as the bags of gold and silver coins of the rich man. The following contract was drawn up in Genoa (Italy) on 22 December 1198 between two merchants and a number of humble people who were prepared to invest their savings in a trading expedition:
We, Embrone of Sozziglia and Master Alberto, acknowledge that we carry in accomandatio for the purpose of trading £142 Genoese to the port of Bonifacio and through or in Corsica and Sardinia; and from there we are to come [back]. And of this [sum], £25 Genoese belong to you, Giordano Clerico; and £10 to you, Oberto Croce. And to you, Vassallo Rapallino [belong] £10; and to you, Bonsignore Torre, £10. And £5 [belong] to Pietro Bonfante; and to you Michele, tanner [belong] £5; and to you, Giovanni del Pero, £5; and to Ara Dolce, £6; and to Ansaldo Mirto, £5; and to Martino, hemp-seller, £5; and to Ansaldo Fanti, £8; and to you, Lanfranco of Crosa, £20; and to Josbert, nephew of Charles of Besançon, £10. And £6 belong to me, Embrone; and £2 to me, Alberto. And all the pounds mentioned above are to be profitably employed and invested, and they are to draw by the pound. And we promise to send [back] the capital and the profit which God shall have granted from this accomandatio [to be placed] in the power of the aforesaid persons to whom they belong. And after deduction of the capital we are to have one fourth of the profit; but the [entire] profit which comes to our [own] pounds is to be ours. [3]
A telling example of the lure and opportunities provided by the commenda is offered by the peculiar story of two clergymen in the early years of the fourteenth century. Giovanni Mauro di Carignano, rector of a church near the main pier in Genoa’s harbor, leased to merchants part of his church as well as the adjacent graveyard, where they stored sails, riggings, and other shipping tackle. When Porchetto Spinola, Genoa’s archbishop, arrived on 21 November 1314, to investigate this peculiar use of church premises, he was lured into a commenda contract with a Genoese merchant heading for France. [4]
By the fourteenth century, things were beginning to change. Trade was becoming a routine activity and the traditional itinerant merchant was giving way to the sedentary businessman operating through agents. As a result, the commenda soon became an outdated form of partnership. As Professor Kedar has shown, the vast collection of surviving Genoese notarial documents clearly demonstrate that the decline of the commenda in Genoa began in the latter part of the thirteenth century and accelerated during the second half of the fourteenth. By the fifteenth century the commenda was quite a rare arrangement. [5] In its place the compagnia emerged as the most frequent form of partnership.
In maritime cities, the compagnia sometimes represented a stage in the development of the general partnership company. By the early part of the twelfth century, Venice already counted several such companies. Yet this form of association never really took hold in coastal cities. André Sayous has accounted for this by emphasizing the risk factor: there was limited appeal in staking all one’s assets on the voyage of a ship that might fall into the hands of pirates or capsize and sink. It made more sense to risk a limited amount of money or merchandise through a negotiator. Conditions were different inland where strong links quickly formed between commerce and manufacturing. Business had to be organized over a longer time frame—longer in any case than a ship’s voyage out and back. So it was in inland areas that companies grew best, often grafted on to that other still sound institution—the family. At first, companies consisted of family members living under the same roof who pooled their assets, i.e. family capital. In these circumstances, limitless liability was the rule, given that the father was answerable for the son, the son for the father, and the brothers for one another. Things got more complicated when it came to dividing out inherited assets and when the volume of business expanded. The means required soared beyond the reach of any single family. The response to this problem was to extend access to the company first to more distant family members, then to outsiders, and finally even to shareholders. As Professor Sapori has written, [6] the involvement of shareholders unrelated to the original family marked the end of the first phase in the history of the company. It was a development that coincided with a general loosening of family ties. As long as companies had operated with nothing but family capital, they had concentrated on trading activities. But once they were operating increasingly with deposit capital, their activities broadened out to cover a mix of banking, commerce, and manufacturing that inevitably exposed them to greater risks and to major insolvencies. This trend was compounded by the spread of bills of exchange, in theory a mechanism for transferring money from one market to another. In practice, however, bills of exchange became the preferred means of money-lending and speculation, [7] helping to make capital highly liquid and internationally mobile.
Thus far we have concentrated on developments in the Mediterranean region. But during the Middle Ages, the Hanseatics in the north also made considerable progress in business techniques. The story of their forms of partnership—the sendeve, the vera societas, the contrapositio, and the complete partnership— parallels southern European developments. [8] A great step forward was made toward the end of the thirteenth century by the institution of business registers whose entries were publicly authenticated. The recording by merchants of their debts and contracts with a municipal guarantee was a decisive factor in the development of credit and commerce in northern Europe during the fourteenth and fifteenth centuries. The Hanseatics, however, lagged behind the Italians in their degree of sophistication in business administration. Double- entry bookkeeping remained unknown in the north until the sixteenth century and the Hanseatics became familiar with the bill of exchange only through Italians operating in Flanders and England. To the north of the Alps no other country attained the sophistication of the Italians in business techniques and company accounting. In the first half of the sixteenth century Matthäus Schwarz, head of accounting at the mighty Fugger company, wrote: “book-keeping... was invented by the Italians. But this art is little appreciated by us Germans and especially by those who think they can make do without it.”
The extraordinary growth of overseas trade and the related expansion in the demand for capital during the course of the sixteenth and seventeenth centuries favored the emergence in England, Holland, and France of a network of trading companies to which a monopoly was granted by their respective national authorities in their specific areas of operation. In England, the Muscovy Company, founded in 1553, was followed by the Spanish Company in 1577, the Eastland Company in 1579, the Levant Company in 1581, and many others. The East India Company was created in 1600 with the subscription of £30,000 to finance the initial sailings and it was destined to become the most famous of all. Most of the companies took the form of joint-stock companies, thus creating the beginnings of a market for stocks and shares.
Economic development depends on the creation of an economic surplus as well as on the transfer of such surplus from “savers” to “producers” when and where the latter could invest such resources most productively. Moreover, in societies suffering from chronic shortages of capital, the availability to the producers of even marginal amounts of savings is of utmost importance. The appearance and dissemination of the business techniques mentioned above has to be seen in this light. The basic fact in the economic history of Europe from the eleventh century onward was that savings were activated for productive purposes to a degree inconceivable in previous centuries.
The story had an ethical aspect also. The development and spread of the contratto di commenda, as that of other partnership contracts, would not have been possible without the precondition of a spirit of mutual trust and a sense of honesty in business. The merchant to whom others entrusted their savings could easily have disappeared with the capital or cheated in business conducted in far-off markets where none of his associates had any control. But if the trader showed himself to be dishonest, after a while no one would entrust their savings to him. It was this widespread sense of honesty, strengthened by the sense of belonging to an integrated community, quite apart from clearcut legal provisions, which made possible the participation of all kinds of people with their savings in the productive process. The development of civil and criminal legislation regarding commercial activities should also be considered from this point of view and should be included among the institutional factors which encouraged development.
MONETARY TRENDS
At the start of the eleventh century, as the economy developed so did the monetary system. Medieval and Renaissance Europe only had metal coinage. The Chinese—as Marco Polo enthusiastically noted—had paper money as early as the thirteenth century. Yet, unlike many other Chinese inventions, this particular innovation was not exported to contemporary Europe.
Metal money is valued in relation to two parameters: weight and fineness. Weight was determined prior to each new coinage by monetary authorities who would specify how many coin pieces were to be struck from a given weight of metal which, depending on the area in question, might be a pound or a mark. In the case of gold coins, fineness was measured in carats. Twenty-four carat gold was absolutely pure, i.e. 24/24. The gold ecu of King Francis I of France, struck in July 1519, was 23 carat, that is to say twenty-three parts gold to one part copper. Silver fineness was defined in several parts of Europe in terms of denari (weight) and grains (weight) per ounce (weight). By definition, there were 12 denari in an ounce and 24 grains in a denarius. An eleven denari fineness meant, in modern terms, a fineness of 916.66 thousandths (11:12=×: 1000).
By multiplying weight by fineness one obtains the fine content of the metal coin. Thus a silver coin weighing 1.76 grams at a fineness of 950/1000 would have a content of 1.76×950/1000=1.67 grams of pure silver.
The content of pure precious metal determines the intrinsic value of a coin. The extrinsic value is the nominal value of the coin, i.e. the exchange value that is attributed to it. The nominal value and the intrinsic value did not usually coincide and the difference was accounted for by the production costs and by “seigniorage,” i.e. the tax levied on coinage.
During the Middle Ages and Renaissance, the monetary system progressed considerably. Between 781 and 795 Charlemagne had managed to introduce throughout his vast empire a monetary reform that his father Pippin had launched and that King Ethelbert of Kent and then King Offa of Mercia had extended to their kingdoms in the British Isles. In its final stage the reform replaced all other coins with a single legal tender, the silver denarius. This coin had to be of almost pure silver, i.e. 950/1000 fineness. The weight of the coins was determined as follows: 240 pennies were struck from one pound weight of silver at a fineness of 950/1000. In terms of our modern decimal system, this meant that each coin had in theory to weigh 1.76 grams (see Table 7.1) and have a content of pure silver of 1.64 grams (=1.76×950/ 1000).
Obviously such a monetary system, relying on only one coin, with no multiples or fractions, was very primitive. One only has to imagine what it would be like if today there were nothing but one-dollar notes in circulation in the US. The situation could be tolerated in early medieval times because transactions were few and far between, most of them took the form of barter, and there were many goods (gems, horses, weapons, wheat, clogs) that were used in the place of cash.
From the second half of the tenth century onward, in response to a growing demand for money, the situation became increasingly unsatisfactory. New mints were built all over Europe. In England, every mint in the kingdom struck coins in accordance with standards (fineness and weight) stipulated by the king or by his officers. So although many new mints were founded, this did not result in a plethora of competing currencies. Things turned out differently on the continent. In Italy and Germany, where the central (imperial) power was conspicuously feeble, each individual town or prince that possessed the legal right to strike coins proceeded to do so, with the result that both countries were quickly swamped with money of all possible weights and alloys. The situation in France was midway between these two extremes. When Hugh Capet ascended the throne (987), French monarchs, like other feudal barons, still struck coins of only local value and circulation. King Philip Augustus (1180–1223) managed to change this situation. While allowing local barons and cities to continue striking their own coin, Philip introduced two overarching monetary systems under royal control: the system of the parisis denarius for the eastern part of the kingdom and the system of the tournois denarius for the western part. King Louis IX (1266–70) then proclaimed the principle that “the baron’s coin might circulate exclusively within the borders of the barony whereas the king’s coin shall circulate throughout the entire Kingdom.”
Mints had to comply with the standards of weight and fineness stipulated by the authorities to which they were accountable (king, city, or baron) but the volume of coin struck was determined by the market, i.e. by the amount of metal that private citizens chose to bring to the mint. A private citizen (normally a moneychanger, a banker, or a merchant) would bring metal to the mint. The mint would then strike money from this metal, following weight and alloy standards currently in force. From the amount of coin struck, the mint would take a cut to cover its own working expenses and another cut by way of “seigniorage” or tax. The remaining money would then be handed over to the citizen who had brought the metal to the mint. To express this mathematically:
M = P + (C+S)
where M is the entire amount of money coined from the metal brought to the mint, P is the amount of money handed over to the person who brought the metal to the mint, C is the amount of money taken to cover the mint’s costs of production and S is “seigniorage.” Self-evidently, P was also the market price for metal.
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| English mints, Athelstan to 973. The circles are of 15-mile radius (24 kilometers) to show the areas within market distance of a mint. Source: Spufford, Money and Its Use, p. 88. |
As time passed, money was gradually debased, with each denomination of coin tending to contain a steadily diminishing amount of noble metal. The exception to this rule was provided by gold coins, such as the gold florin from Florence and the gold ducat from Venice, both of which served as international means of payment.
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| English mints, 973–1066. Source: Spufford, Money and Its Use, p. 89. |
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| A mint at work during the Middle Ages. The person in the center of the picture is beating a sheet of metal to reduce it to roughly the desired thickness. The person on the left is using a large pair of scissors to cut the sheet into small disks of roughly the desired size. The person on the right has placed one of these metal disks between two minting dies (one held in the hand, the other sunk in the block of wood). He is about to bring his hammer down on the upper die in order to produce a coin bearing the desired picture. As can be seen, minting was a very primitive process. It was not until the sixteenth century that the Germans invented a way to mechanize the process involving water-driven mills. |
At first sight, all that was needed to increase revenues from taxing coinage was to increase S (seigniorage). But if S was increased while leaving C and M unchanged, P would be squeezed. A drop in P, the price paid to whoever brought metal to the mint, would soon restrict the flow of metal to the mint and result in a fall in S rather than an increase. If monetary authorities wished to increase the tax revenue from S, they therefore had to find a way of increasing P. Since C (production costs) could not be significantly reduced, the only way to increase both S and P was to increase M, the amount of coins struck from a fixed amount of metal. In other words, they had to devalue the currency.
But devaluations could also have monetary causes. It should be borne in mind that throughout the Middle Ages, western Europe suffered from an inadequate supply of precious metals. This shortage is vividly illustrated by the fact that medieval coins were always wafer-thin discs of metal. If the monetary authorities wished to increase the amount of money in circulation, they had to find a way of attracting citizens to bring metal to their mint rather than to a competing one. The way to do this was to increase P, the price paid for the metal. Unless S was to be proportionately cut (a course rarely chosen), and since C could not be substantially reduced, any increase in P necessarily entailed an increase in M—more coins from the same amount of metal—devaluation once again.
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| Barter and the exchange of money were often combined. The miniature reproduced here portrays two peasants who are trading a pair of shoes for a pigeon. The shoes, however, were clearly worth more than the pigeon and the peasant who wants the shoes is about to hand over a coin as well as a pigeon. |
Devaluation might also be, as it were, involuntary. Even without any help from coin-clipping fraudsters, metal coins in circulation wore down at a rate of between 0.1 and 1 percent a year. This confronted monetary authorities with a tricky problem. If they continued to strike coins without altering either their weight or their fineness, before long the new coins would vanish from circulation, following Gresham’s law that bad money (the coins in circulation) chases out good (the newly minted coins). They might of course withdraw worn coins from circulation and replace them with new ones, though this would be hard to do and very costly. The solution adopted most frequently was to bring newly minted coins into line with already circulating coinage by issuing debased coins.
Of all western European countries, England distinguished itself by the relative stability of its coinage. English mints (the most important of which was at the Tower of London) remained under the strict control of the Crown. English monarchs, on the other hand, were strongly conditioned by the feudal barons who, since they did not manage the mints themselves, had everything to lose and nothing to gain from any debasement of the coinage. Around AD 800, the English pound was worth approximately 330 grams of pure silver. By the mid-thirteenth century, its value had only fallen to 324 grams. By 1500 it had dropped gradually to 170 grams. The real collapse of the coinage occurred between 1542 and 1551 and was a result of Henry VIII’s imperious and extravagant ways.
In France the monetary system introduced by King Louis IX (1266–70) gained a place in French memories as “la bonne monnaie de Monsieur Sainct Loys.” And indeed the system inaugurated by “St Louis” survived intact for several decades. It was in the time of Philip the Fair (1285–1314) or, to be precise, in the 1290s that the French currency became unstable. From then on, it was subject to a whole series of frantic and drastic devaluations and revaluations. The main reason for this instability was the Hundred Years’ War. The most calamitous periods occurred during the reigns of Philip VI of Valois (1328–50), John the Bountiful (1350–64), and Charles VII (1422–61). During John the Bountiful’s reign, monetary changes came so thick and fast that one noted numismatist (Jean Lafaurie), when he came to publish his classic survey of coinage under the kings of France, decided against any attempt at reconstructing the helter-skelter series of mintings during that reign. It was in 1395, in the middle of that monetary storm, that Nicola Oresme published his treatise on coinage. Oresme advanced the thesis—then quite revolutionary—that a country’s coinage did not belong to the king and that it was improper for the rulers to resort to monetary juggling as a means of taxing the people.
In 1266 the tournois had a par value of about 80 grams of fine silver. By 1450 this had fallen to 30 grams and to about 20 grams by 1500. Although interesting, these figures hide more than they reveal. The fact is that between 1290 and 1438 the history of French currency was, as was mentioned above, one of frequent indeed often feverish devaluations followed by equally drastic revaluations. To give a rough idea of the prevailing state of chaos, one has only to mention that between 1350 and 1360 the tournois underwent no less than 71 alterations in both directions (devaluation and revaluation) and between 1422 and 1438 it underwent 52 such changes. For many years any average of the par value of the tournois would be almost meaningless, so fast and furious were the alterations to which it was subjected. The placid and gentle course traced by the English currency decade after decade offered a dramatic contrast to the leaping and diving of the French coin. It is hard to say why the French stubbornly insisted on pushing through such drastic revaluations after unsettling the market with as many drastic devaluations: what is certain is that the economy suffered not a little from this spate of alternating inflationary and deflationary shocks (analogous to the stop and go of modern monetary policies).
The monetary situation in Italy was quite different from that in either England or France. In the long run, the Italian currency was debased just as much if not more than the French one: but the downward curve in Italy was gentler, free of the convulsive surging and plunging of the French currency. Table 7.1 gives an overall picture of the long-term devaluation in the four major Italian city states.
Table 7.1 Equivalent of the local monetary unit (lira) in terms of pure silver in four major Italian city states
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The Carolingian system, as has been mentioned, involved only one denomination, the denarius. This might work well in a primitive economy and society where there was very little trading activity and where barter was very widespread. By the eleventh century, however, the European economy was growing in complexity and a monetary system restricted to a single denomination became increasingly cumbersome. To make matters worse, the coinage was steadily debased. In thirteenth-century Venice, the denarius withered to a wretched little disk barely a centimeter in diameter and weighing only 0.08 grams. It was so light it would float and so thin and fragile that if you weren’t careful it would break in your fingers. It is not clear why the Venetian denarius had so quickly fallen into such a sorry state. The Venetians had probably sought to attract to their city the metal produced in the silver mines of central Europe by increasing the price they paid for metal and, as has already been emphasized, this entailed a debasement of the currency. Venice badly needed silver in order to buy oriental products in the markets of the Middle East and if that meant debasing their currency, Venice was ready to do that. Venice, however, seems to have been an extreme case, even if matters were not much better elsewhere. In Genoa, by the year 1200, the denarius had been whittled down to a flimsy disk weighing a mere 0.28 grams. It was at this point that the first major reform of the system was introduced. It seems that the crusaders who had arrived in northern Italy to take part in the fourth Crusade brought with them considerable amounts of silver for the purchase of ships, victuals, and the hiring of mariners. Be that as it may, around the year 1200 in Genoa and Venice, multiples of the denarius were struck. These were silver coins called grossi (“big ones”), whose fine content recalled Charlemagne’s denari. The Genoese grosso weighed 1.7 grams and was worth 6 of the old local denari, now known as piccioli (“small ones”). The Venetian grosso weighed 2.2 grams and was worth 26 of the small local piccioli. There must have been a pressing need for these new coins, for their popularity was immediate and mints both in Italy and abroad soon took to striking grossi.
The arrival on the scene of the grossi signaled a new phase in which multiples of the old denarius quickly proliferated. In quick succession there appeared the treina (3d.), the quattrino (4d.), the sesino (6d.), and the pieces of one soldo (12d.), two soldi (24d.), three soldi (36d.), and five soldi (50d.). The magic moment, however, came in 1252 when Florence and Genoa, almost simultaneously, issued a heavy pure gold coin weighing roughly 3.5 grams. This master stroke broke the centuries-old Carolingian monometallic (silver) system and cleared the way for a bimetallic system. Florence’s golden florin soon became the internationally preferred means of exchange and payment. Across Europe a series of more-or- less successful attempts were made to follow the Florentine and Genoese example by striking gold coins (see Table 7.2). Strangely enough, Venice was slow to follow the lead set by Florence and Genoa: the Venetian gold coin, the ducat, did not make its appearance until 1284. The Venetians may have been wary about creating a coin in competition with their silver grosso which had met with such an enthusiastic reception in the Orient. Besides, Venice was the preferred market for German silver.
Silver grossi and gold pieces too were very slim coins. As has already been pointed out, throughout the Middle Ages, Europe suffered from an inadequate supply of precious metals. This situation, however, began to change by the mid-fourteenth century. During their exploration of the African coast, the Portuguese had come upon regions rich in gold such as Guinea and the Gold Coast (now Ghana). Gold from these areas had traditionally been transported in caravans across the Sahara to north African ports and from there shipped to Europe. Shortly after the arrival of the Portuguese in Guinea and the Gold Coast, the trans-Saharan caravan trade was disrupted and increasing quantities of gold started to arrive in Europe aboard Portuguese caravels. It is significant that in 1457 the Portuguese launched their own gold coinage by striking a coin, the cruzado, using gold from Guinea.
At about the same time, fresh developments were taking place in Germany. Rich deposits of silver were discovered in the Tyrol and in Saxony. The production of Tyrolean silver at Schwaz tripled between 1470 and 1490 and the output at Schneeberg in Saxony rose from a few hundred marks in 1450 to several thousand marks by 1470. A considerable proportion of this silver found its way onto the markets of Venice and Milan, with which southern Germany had particularly intense trading relations. In 1472 the mint of Venice and two and a half years later the mint of Milan struck silver coins that broke with the medieval tradition in two respects. Firstly, in terms of their artistic appearance, the new Venetian coin bore a portrait of the doge Tron and the new Milanese coin that of Duke Galeazzo Maria Sforza. In both cases, the portrait was perfectly realistic and bore the clear marks of Renaissance artistry. In more concretely monetary terms, both coins were quite different from the wafer-thin coins of the medieval period. They were chunkier, heavier, and contained more silver. The new Venetian coin weighed 6.52 grams and had a fineness of 948 thousandths. The new Milanese coin weighed 9.79 grams with a fineness of 963.5 thousandths. Such standards contrasted sharply with those of the various grossi then in circulation, whose weight, at most, was around 2 grams. Owing to the head-and-shoulders portraits on the head side of these coins, the coins themselves came to be known as testoni (“big heads”). Quick to find favour among merchants, coins of this new type soon appeared in France and the Low Countries (see Table 7.2, section 4).
Table 7.2 Equivalent of the local monetary unit (pound) in grams of pure silver
Table 7.3 Silver outputs from various central European mines: annual mean outputs in kilograms for years of extant data
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| Source: Munro, “The Central European Silver Mining Boom,” p. 167. |
The rush towards chunky and heavy coins did not stop at the testoni. In 1486, Archduke Sigismund of the Tyrol, elated by the discovery of silver deposits on his territory, struck a silver coin called a guldiner weighing about 31.9 grams. In Bohemia, from 1519 onwards, using silver from the valley of St Joachims (nowadays known as Jachymov), Stefan and his seven brothers, all of whom were counts of Sclick and, as such, owners of the mines, struck silver coins weighing roughly 28.7 grams and known as thalers.
These Portuguese and German developments were a mere foretaste of the huge Spanish-American adventure about to unfold. From the first years of the sixteenth century and at a gathering pace after the mid century, Spanish fleets brought back to the European continent fabulous amounts of gold and above all silver. It was then that there appeared a silver coin, struck in Spain or in Mexico or in Peru and known as the Real de a ocho (piece of eight realos), weighing 30 grams and with a fineness of roughly 930 thousandths. The Real of Eight (or Piece of Eight as it was often called) quickly became by far the most important coin in international trade and finance throughout the sixteenth and seventeenth centuries. We shall return to this remarkable story in Chapter 9.
Coinage remained by far the most prevalent means of exchange in Europe throughout the whole of the Middle Ages and the Renaissance: as mentioned above, unlike contemporary China, in Europe paper money was unknown. But from the twelfth century onward, in the most developed areas, coinage was increasingly supplemented by money created through banking activity, i.e. by what, in today’s economic statistics, appears under the heading of “deposits.” For those unversed in economics, the term “deposits” may be somewhat misleading. It might be mistakenly imagined that the term refers to real amounts of cash actually stored at banks. Yet only a fraction of the money defined as “deposits” is physically kept in banks. The bulk of “deposits” is intangible, existing only in bank entries, and is created by bankers according to their willingness to take on “risk.” A Florentine chronicler in the sixteenth century wittily referred to such “deposits” as “ink money.”
The terms “banks” and “banker” make their first appearance in twelfth and thirteenth-century notarial cartularies where they refer to money-changers. Given the vast range of coins in circulation at that time, money-changing was an activity of considerable importance in the major markets. Moreover, these bankers and money-changers operated as intermediaries between the public and the mints. By the end of the thirteenth century, money-changers in the main trading markets were no longer willing to confine themselves to the manual exchange of different kinds of metal or to acting as intermediaries between the public and the mints. Instead they began to take deposits and to make payments on behalf of depositors.
Deposits thus came to be transferred from one trader to another and these transactions were effected by means of a straightforward entry in the banker’s books, thereby avoiding the transportation and handing- over of actual coins. The transfer operation was not conducted on a written order, but rather in the presence of the parties involved. In other words, if Mr Smith wished to make a payment to Mr Brown, the two men would go together to see Mr Jones, the banker with whom Mr Smith had deposited money. Mr Smith would declare to his banker Mr Jones the quantity of money that he wanted to transfer to Mr Brown. Then, in the presence of both Smith and Brown, Mr Jones the banker would enter the transaction in his book, reducing Mr Smith’s deposit by the amount in question and increasing Mr Brown’s deposit by the same amount.
The evidence of the transaction in the banker’s books was legally binding. Transfers carried out on written order (i.e. cheques) made their first appearance in Tuscany during the fifteenth century. In Venice, however, such cheques were never accepted and both parties always had to be present when any transfer was effected.
Sometimes a depositor might ask his banker to repay in cash all or part of the sum deposited, or a payee might demand to receive his payment in cash. To cover any such eventualities, bankers always had to hold a certain amount of cash. Over time, however, bankers found that it was not necessary to keep cash sufficient to cover the total value of all deposits: they only needed to have a fraction of that amount to hand and could therefore lend out the rest at interest to third parties or, alternatively, invest directly in trading activities. Bankers realized, in other words, that they could operate on a fractional reserve basis. This is the origin of bank money. Professor Reinhold C. Müller, in an excellent article on Venetian coinage, has shown that as early as 1321 bankers in Venice had created bank money by operating on such a fractional reserve system.
Creating money on the basis of deposits received, the bankers increased market liquidity and helped to loosen the deflationary stranglehold that the shortage of precious metal exerted on the European economy throughout the whole of the Middle Ages. Furthermore, the bankers’ activity promoted the investment of savings. In England, where monetary circulation was more homogeneous than on the continent and where the public was not confronted with too broad a spectrum of different coinages, there were not many money- changers. The developments outlined above did however occur in England too, though in England it was goldsmiths rather than bankers/money-changers who collected deposits and created money by granting loans on the basis of deposits they had received.
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| 1 The silver penny of Charlemagne; 2, 3, and 4 the main gold coins of medieval Italy, respectively the genoina of Genoa, the florin of Florence, and the Venetian ducat; 5 the lira Tron of Venice; 6 the “testone” of Galeazzo Maria Sforza of Milan. The coin photographs were kindly supplied by the Fitzwilliam Museum, Cambridge. |
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| A "real de a ocho", known in England and in the English colonies in America under the name of piece of eight. This one was minted at Segovia by Philip IV in 1633. The mint is indicated by the aqueduct on the left of the shield, the value by the figure 8 to the right. The real de a ocho was the means of payment par excellence in the international trade and financial transactions of the sixteenth and seventeenth centuries. Photograph kindly supplied by Professor P.Grierson and the Fitzwilliam Museum, Cambridge. |
The creation of bank money, as has been said, was on the whole a positive development for the economy. Yet it also entailed some considerable drawbacks. The economy at that time was fragile and panic could spread fast among dealers. Shipwrecks were frequent, wars an everyday occurrence and merchants often fell victim to tricks played by foreign governments. The high risks that traders had to run rebounded on the bankers who loaned them capital. Whenever panic ran through a particular market, people would hurry to the banks to withdraw their deposits. But bankers only kept enough ready cash to cover a fraction of the deposits they had received: the money required to refund all the depositors who might come to the bank to claim their money back simply was not there. It was tied up in the investments and the loans that the bankers had made. In a similar situation today, the central bank can intervene to act as a lender of last resort. But in those days there were no central banks and panic therefore often led to bank failure. The history of banking in the Middle Ages and during the Renaissance is thus a sorry tale of continual bankruptcies. In some of the most important markets interesting attempts were made at remedying this situation. In Venice in 1356 and again in 1374 proposals were made for the establishment of a public bank that would keep reserves equal to 100 percent of its deposits.
In 1587, again in Venice, the banco della piazza di Rialto was founded with precisely this purpose. A bank of this kind could still carry out money transfers and assist in making payments but it would not create bank money. In Barcelona in 1401 the Taula de Barcelona bank was banned from making loans to private dealers and had to limit its lending activities to making loans to the state. But these were fallback solutions that did nothing to solve the fundamental problem facing banks in their role as money-creators.
Notes:
1. It is possible that double-entry bookkeeping developed in Tuscany in the thirteenth century. In the fourteenth and fifteenth centuries this type of accounting spread to other Italian cities. See De Roover, “Aux Origines d’une Technique,” and Melis, Storia della Ragioneria. Prototypes of marine insurance may have emerged in the thirteenth century, but the earliest extant documents which undoubtedly refer to insurance contracts go back to the fourteenth century. Genoa long remained the major center for this type of business. See Edler De Roover, “Marine Insurance.” From the seventeenth century on, the major center of insurance in Europe was London.
2. Postan, “Credit in Medieval Trade,” pp. 65–71.
3. The original document, in Latin, is preserved in the Archive of Genoa. The English translation is by Lopez and Raymond, Medieval Trade, pp. 182–83.
4. Ferretto, “Giovanni Mauro di Carignano,” pp. 43–44.
5.. Kedar, Merchants in Crisis, pp. 25ff. One form of participation in maritime trade was the sea loan. Its main peculiarity was that the borrower pledged the return of the loan only on condition that the ship carrying the borrowed money or the goods purchased with it safely completed its voyage. Sea loans lost their popularity at the same time that the commenda did, in the second half of the thirteenth century.
6. Among the many who have written on the subject, see Sapori, “Le Compagnie Mercantili Toscane,” pp. 803–05.
7. De Roover, Lettres de Change.
8. In the sendeve a master entrusted an agent with goods. In the vera societas only one of the parties provided capital. The other carried out the commercial operation and profit and losses were usually shared equally. In the contrapositio each partner brought his share of capital and profits were shared in proportion to the capital invested. In the complete partnership partners pledged in common all or the greater part of their fortunes. For more details see Dollinger, The German Hansa, pp. 166–67.
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