Economic History
Money and Finance
Introduction
This aspect of the early modern European economy saw significant turmoil and some major new developments. The discovery of an entire mountain of silver in Bolivia in the mid-16th century sent prices soaring and gave Europe its first taste of chronic inflation. Also in the later 16th century Europeans developed the first money markets and invented some new forms of investment that would lead to new kinds of businesses.
Money
What is money?
Modern money is literally not worth the paper it's printed on. In pre-modern Europe, though, money was principally precious metals, bullion: gold, silver and copper, mainly, usually mixed with nickel or other metals.
Besides physical coins there existed something called "money of account." These was a monetary unit that had no physical counterpart, no coinage; it was a unit used only in keeping and settling accounts. When you read about the German mark or the British pound or the French livre in our period, you should not think that someone had a silver mark in their pocket or a five-pound note in a drawer. Those were markers only, used by merchants (mainly) for carrying out large-scale transactions. A silver penny could be used to buy a yard of cloth, but it wasn't practical for buying bales of the stuff by the wagonload.
Money of account was always tied to an equivalent in bullion—silver, normally—and in theory could always be converted to bullion. One of the great fiscal innovations of the modern age has been the unhooking of money from bullion.
Bullion and Coinage
Europe's supply of bullion increased from 1500-1580, boomed 1580-1620, and declined 1620-1700. Even so, the economy and especially prices rose faster than the supply of money. This helped create the demand for finance and especially for credit. The shortage was real and physical: there simply weren't enough coins.
This period marks the expansion of credit mechanisms all across Europe. The techniques had mostly existed for some time, but were used by few, mostly by the Italians.
In 1500 Europe had a rather limited stock of bullion: 3500 tons of gold and 37,500 tons of silver. These are very rough figures. I cite them mainly to put into perspective what comes next.
From 1500 to 1650 there was about a 5% increase in the gold stock and a 50% increase in silver. The New World was a major source, but important secondary sources included new silver mines in Europe, and a gold trade with Africa.
But bullion flowed out as well, especially to the Middle and Far East. England sent £750,000 to the far East between 1601 and 1624, and nearly that amount in 1700 alone. At a rough estimate, Europe was exporting about 80,000 kg per year around 1600. Again in very general terms, Europe gained in bullion, modestly but steadily, in the period 1500 to 1580, gained dramatically 1580 to 1620, and then declined thereafter.
Despite the massive influx of bullion, prices rose even faster and there was a shortage of coins. Not Europe-wide, but localized, there would literally not be enough coinage to transact large-scale business. A fleet might arrive and find willing buyers, yet no one able to get together enough hard currency for a purchase. We know of trade fairs that had to be cancelled, more than once, because of a shortage of coins. The situation could catch a merchant flat-footed and bankrupt him. The Fuggers were not the only merchant familyt to keep boxes of coins—essentially a reserve bank—in the family home.
Lending
Lending ran the gamut. Wealthy peasants could lend, but mostly it was merchants in nearby towns, who had connections into the countryside. The need for loans might derive from a harvest failure, land purchase, or capital investment. Urban workers might suffer a market collapse. A master might try to buy another shop. A merchant could suffer all sorts of losses: shipwreck, bandits, war, or any number of forms of bad investment.
Most towns had pawnbrokers. Merchants lent to one another. Even bishops and monasteries lent. Nobles mostly borrowed. And then there were banks of all sorts. Savings banks didn't exist, though. These were commercial banks, merchant banks.
Rural Loans
A new type of rural loan developed in the 16th century: the rente. This is not "rent" in the modern sense but a type of loan in which the farmer pledged his land as collateral. A similar form of rente pledged a portion of next year's crop. [533] In either case, the farmer was at risk of losing his farm, either by direct forfeit or by losing so much of his crop that he couldn't plant enough to survive.
A common form of rural credit was to get money this year to be repaid out of the harvest of next year. In other cases, actual property was pledged. So long as harvests were good, all was well. When harvests failed, credit could be carried over, but a run of bad harvests could ensure a family would never climb out of debt, or would have to sell the farm (if, indeed, they owned it). If the failures were widespread, as in the late 16th century and again in the 1630s and 1640s, the consequences could ruin creditors and debtors alike, leading to social dislocations and peasant revolts.
In Rome in 1582 about six percent of the population (5,942 individuals) were in prison for debt.
Goldsmiths and jewellers lent to the nobility, who in turn pledged plate and jewels. Italians were the big moneylenders in the west, Jews in Germany and Italy and eastern Europe. This is because the countries in the west had expelled their Jewish populations in the late Middle Ages.
Some merchants becamse moneylenders exclusively.
In Italy developed the Monte – eight-nine of them by 1509. People donated cash to create the original fund. Sometimes these donations were forced by law. Thereafter people gave money as an investment. This gave a typical return of four percent, but it was guaranteed. The Monte lent money, but always in small amounts, mainly to the poor, though the customer base expanded over time. It was partly a charity: some loans were interest-free, though a pawn was required. But mainly it became a secure investment, since the Monti were run by the cities themselves. This institution remained mainly Italian; something similar developed in the Netherlands.
The Swiss copied the Dutch, creating state banks like the stadtwechsel in Basel, whose purpose was to lend not only to the poor but also to artisans and district peasants who wanted to expand their operations.
The poor mainly had to rely on charity. Nearly every community had a fund or reserve intended to rescue the very poor. This might include not only money but grain, seeds, livestock, clothing, even tools.
Private banks were numerous. It's difficult to estimate numbers because a private bank might be no more than a goldsmith or a notary with loans out to a few clients. The fortunes of these private banks were volatile. They could grow rapidly and crash spectacularly, ruining others as well as themselves. On occasion, a wave of failures might take out several banks in succession. This happened, for example, in the wake of royal bankruptcies.
The Protestant reformers had much the same attitude as the Catholics regarding lending at interest. Both Luther and Calvin praised those who lent to the needy at low interest (less than six percent per annum), and condemned or criticized lending for profit. When Calvin tried to limit all loans in Geneva to five percent, the merchants there threatened to emigrate to Lyon. He finally gave in and the lending rate was raised to six and two-thirds percent. After Calvin's death, Theodore Beza had to allow it to rise to ten percent after he was faced with a similar threat (1568). The same rate was approved by the English Parliament in 1545.
If you still think Protestantism is the natural home of the capitalist, consider this: at the general synod of the Dutch Reformed Church in 1581 it was decreed that no banker nor his servants should be allowed communion, and his family could be allowed only if they expressed their disapproval of the profession. This decree persisted and was reiterated at Dutch synods until 1658. It was removed then not by the Church but by the secular government.
Interest rates generally fell in our period. Rates in the later Middle Ages were quite high. By 1600 or a little earlier, rates were generally ten percent or less, with pawnbroker rates rather higher.
Bills of Exchange
A given merchant might have a number of bills of exchange in his possession at any time. He could (and did) assign these to someone else in payment of his own debts. The law courts recognized that the third party still had a right to be paid by the original debtor. Thus did bills of exchange gradually become negotiable bonds, serving as a kind of paper money.
Also in the 16th centuiry we see the first general practice of cheques (there were isolated earlier instances). This was a signed piece of paper authorizing a banker to withdraw a specific sum and give it to the person named. Many banks still would not do this unless the account holder were physically present. Venice held out for a long time in this regard. But the use of cheques grew steadily. They were also called bank notes. The use spread to England in the 1660s.
Clearing Banks
One early way to pay a debt without using money was when two merchants had accounts at the same bank. A would go in person to the bank and order a certain sum to be transferred to the account of B. If A lived in Antwerp and B lived in Genoa, they simply opened accounts in each other's banks and did transactions by letter via factors (personal representatives).
This worked at the individual level, but could not work for that staple of medieval trade, the fair. At the great fairs of Frankfurt or Nurembert or Lyon, merchants came from all over, and they didn't want to come with cartloads of cash. Instead, bankers appeared, who recorded all transactions. Once the fair was over, they did their sums: merchant A bought this much and sold that much and how owes (or is owed) a certain amount. If the bankers had cordial relations with one another, they could debit and credit in their books, effectively transferring funds from one place to another.
This could be quite an operation. One of the largest of the 16th century fairs was at Medina del Campo, in Spain, which was regularly attended by two thousand merchants who were served by fifteen bankers. The settlement of debts was done mainly by book-transfers between the banks. Vast wealth was moved in this manner, and not only in Spain. For example, at the fairs of Piacenza (near Milan) millions of scudi changed hands on paper, though the amount of cash present was more like a quarter of one million. In addition to settling actual trade, these clearing-house operations were also a time for extending and renegotiating existing debts.
The next natural step was for this clearing operation to become permanent rather than seasonal. This was the original, primary function of the Exchange (also called a Bourse or a Lonja): in Antwerp by 1531, London in 1571, Seville in 1583, and Amsterdam in 1611.
The Amsterdam Exchange became a major financial force in the 17th century. Opened as a bank in 1609, it was the only institution in the city allowed to pay or transfer any bill of exchange over 600 florins in value. This effectively meant that all except small merchants had to have an account there. As Amsterdam grew in importance, the Exchange Bank became the chief clearing-house of Europe. The bank never allowed overdrafts, so it always had bullion enough to pay everyone, making it reliable and trusted. Moreover, the bank itself was backed up by the city government. In a time when so many other governments and banks were unstable, the Bank of Amsterdam was the safe haven for capital.
Banks
The Italians had developed the institution of the Monte in the 15th century. The first was in Perugia in 1462 [534] and by 1509 there were 89 of them. The Monti were run by the city, which sometimes contributed to the initial capital reserve, usually through a tax. Its primary purpose was to provide small, short-term loans to the poor (e.g., two ducats for six months). Pious donations kept the fund going, but cities also began to allow private citizens to buy shares in the Monte with a 4% return, and so this can be considered an early version of deposit banking. As useful as the system was, it never caught on outside of Italy. [535]
Amsterdam founded a lending bank in 1614, mainly for providing small loans to the poor, but it also lent to small businesses. It was funded by selling bonds.
Neither of these forms of lending institutions was useful for commerce because the borrower was required to have collateral, whereas a merchant wants to borrow speculating on profit, rather like the rente loans where the farmer borrows against the next harvest. Merchant banks were formed to meet this specialized need. This began as private loans from one merchant to another, but gradually developed into formal, government-approved or even government-funded enterprises.
Cheques did not become general until the late 17th century. Bills of exchange gradually became negotiable and even could be discounted.
Exchanges and Bourses
Began at the medieval fairs. Merchants did not pay cash for every transaction; instead, every transaction was noted in bankers' books. At the end of the fair the bankers toted everything up and only outstanding balances were settled in coin. Pre-existing debts would also be extended or renegotiated or settled. Over time, some bankers came to specialize in this and did no mercantile activity at all.
As the fairs declined, exchange activity became concentrated in certain towns: Amsterdam in 1611, for example. [548] These were permanent offices where the exchange of paper of commercial and especially financial transactions could take place year round instead of just for the duration of a fair. Like the fairs, the exchanges (bourses) had fixed settlement days (rescounter) when the books were closed out and actual money changed hands.
Deposit banking developed gradually, but the Rialto bank in Venice had deposit banking as part of its charter in 1587. [549]
Government helped. In Amsterdam, all bills more than 600 florins could be settled only at the Wisselbank. Even here, though, no money could be lent to private individuals and no overdrafts were allowed.
Exchanges
Commerce requires endless meetings. A market is needed, fairs are exciting, but one needs a place for conducting all the business that surrounds the buying and selling. Merchants had literally to meet in the plaza or on the street until a town had built an Exchange. Its chief business was the buying and selling of paper, so the second prerequisite was sufficient trade in paper to justify the construction of such a place.
The Amsterdam Exchange, finished in 1631, held over 4000 people. Not only did bills and drafts fly back and forth, so did news, rumor, negotiations, and deals. And all of this between noon and 2pm, the hours of the Exchange.
At a fair, the last few days of the event were set aside for reckoning up accounts and paying bills. An Exchange was essentially this phase made permanent, because the frequency of commerce had reached such a level. In fact, even the Exchanges began to specialize; for example, a corn exchange.
Something of the flavor of the business of Exchanges can be had from this quote. It's from Joseph de la Vega, describing the scene in Amsterdam in 1688. It takes place not in the Exchange itself, but in a coffee shop nearby.
"Our speculators frequent certain houses in which a drink is sold which the Dutch call coffy...." These houses "are of great usefulness in winter with their welcoming stoves and tempting pastimes: some offer books to read, others gaming-tables and all have people ready to converse with one; one man drinks chocolate, another coffee, one milk, another tea and practically all of them smoke tobacco.... In this way they can keep warm, be refreshed and entertained for little expense, listening to the news.... There then comes into one of these houses during the opening hours of the Exchange one of the 'bulls' or bidders-up. People ask him the price of shares, he adds on one or two percent to the price of the moment, takes out his little notebook and pretends to write in it what he has only done in his mind, letting everyone believe he has done it, and in order to encourage in every heart the desire of buying some shares, for fear they should go up again."