As anthropologists have pointed out for a long time, there is really little evidence of trade taking this form in primitive communities ... Instead, these societies operated as "gift giving" economies, or informal credit systems.
What then, explains monetary exchange (really, the coexistence of money and credit)? According to Kiyotaki and Moore, Evil is the Root of All Money. "Evil" here is interpreted as the existence of untrustworthy (noncooperative) people. Untrustworthy individuals readily accept gifts from the community, but cannot be trusted to fulfill their implicit obligation to reciprocate in-kind when an opportunity to do so arises. However, we know from game theory that a system of "cooperative" exchange might still be sustained if untrustworthy people can be compelled to behave properly, say, by the threat of punishment for noncompliant behavior (e.g., ostracism from the community).
The punishment/reward system that implicitly exists in gift-giving societies requires ... a communal monitoring of individual behavior. In small communities, "everybody knows everything about everyone" and so this is arguably why "communistic" societies can be sustained in small groups. It also suggests why the arrangement breaks down for larger groups. The virtual communal data bank -- a distributed network of computer brains -- is simply not capable of recording all the information necessary to support an informal credit system in a large population. In a large population, people can remain anonymous. We necessarily become strangers to most people. And its tough to trust a stranger (a person you are not likely ever to meet again).
Nevertheless, multilateral gains to trade may still exist even among strangers. And if credit is difficult, or impossible, then the solution is money (see: The Technological Role of Fiat Money, by Narayana Kocherlakota). According to this theory, money serves as a substitute for the missing communal memory. Contributions to society are now measured not by virtual credits in the collective mind of the community; instead, they are recorded by money balances (this assumes, of course, that money, like virtual credit, is difficult to counterfeit/steal).
So, in a nutshell, economic theory suggests that we use informal credit arrangements to govern exchange among people we know (family, friends, colleagues, etc.) and we use money to facilitate exchange with "strangers." The emergence of money then seems tied to the emergence of strangers. An obvious explanation for this is population growth (and the associated rise of large urban areas).Debt: The First 5000 Years (MacroMania)
As societies grew larger and more complex, the debit/credit system of the ancient temples transformed into tokens, and these token became the beginning of what we now as money. In fact, it is these tokens which probably led to the invention of writing. See this fascinating post: Two Precursors of writing; plain and complex tokens (Escola Finaly)
In addition, the "blood price" system of certain tribal peoples led to a system where an equivalent cost value was placed on everything. This was used in settling of "official" justice where the traditional systems of reciprocity and redistribution were not valid and, as Graeber notes, where the threat of violence was present. Most people throughout history even into the nineteenth century (and today in many places), lived outside of this money economy.
The evolution of impersonal exchanges mediated by money evolved gradually. The Bronze Age was a critical time. Scholars note that the major components of bronze - copper and tin - are located in vastly different areas, and this is thought to indicate the presence of large trading networks, from the Middle East to the Mediterranean to the British Isles. Empires formed in Egypt, Babylonia and Persia, and the Phoenicians spread innovations like numbers and writing around the Mediterranean. Trading networks became larger and more complex in the Bronze Age, and many of the financial "innovations" we associate with today began - futures, contracts, insurance, loans at compound interest.
As Michael Hudson tells it, the role of debt played a critical role throughout history. When debt was administered through the temples or through the central authorities (kings and emperors), they would be cancelled if they became too onerous. But once debt escaped the temples and became a direct social relation (like money), the debts would no longer be cancelled, and people fell into debt slavery and wealth became concentrated in an oligarchy. As Hudson notes, it was a standard practice for invading armies to offer to cancel all the debts of the citizenry if they took over, and in this manner often times people would aid the invading armies and overthrow their own government:
“There was a constant tension from the Bronze Age through classical antiquity between rulers trying to maintain a society under their control, and local headmen trying to get power for themselves. The big question was who would run society and draw up its rules. Would it be the priesthood and military rulers at the top of the pyramid, or creditors and warlords grabbing peoples’ land and trying to create their own control? Strong rulers like Hammurabi were able to centralise rule. He proclaimed andurarum upon taking the throne, and numerous times thereafter, down to his 30th year of rule. When he was sick and dying, his son Samsuiluna also proclaimed misharum to restore order to start his own reign in balance. But then you’d have Intermediate Periods with afree-for-all in which local leaders gained autonomy. And they simply disobeyed royal Clean Slates.”
“From 1200 BC to about 750 BC in the Mediterranean you have a Dark Age. Apparently you had not only very bad weather around 1200 BC – maybe a small Ice Age and drought – but the weather and crop failures led to mass migrations and invasions. The palaces of Mycenaean Greece were burned and syllabic writing disappeared for nearly 500 years. Then, when you have alphabetic writing emerging, the person whose title originally meant “local branch manager” of the palace workshop suddenly appears as the basileus, the ruler. But mostly you have landholding aristocracies holding the population in debt serfdom (like the Athenian hektimoroi, “sixth parters” liberated by Solon in 594 BC). It was much like the post-Soviet kleptocrats when Red Managers gave themselves control of their companies. When central power falls apart, local headmen take over. The dissolution of royal power led to privatization – including the privatization of credit, taking it and its rules out of royal hands. So Clean Slates stopped.”So debt is used by powerful headmen to hold the population in slavery. This gives rise to the inequality that we see. We see elites taking of control of the land via debt:
Mortgage. Gage is derived from a French word meaning "hand." A hand, in Saxon and Norman times, was laid upon the land, to secure a debt of the landholder. Under the common law there were two types of gages. If the lender took control of the property, collecting its rents and produce until the debt was paid, that was a "live" gage. The creditor kept the land long enough to collect the rents and profits sufficient for his debt, then returned it.
The second gage was known as a "dead" gage. The debtor kept control of his land and made payments from its income. Mort being the French word for "dead," the instrument was known as the mort-gage. If the borrower did not meet the payments agreed to, the lender could seize the property under the mort-gage. But if he made the payments, the borrower always retained control.
In the nineteenth century, in this country and in some countries in Western Europe, "building and loan" associations were formed to hold the savings of working people and to lend those savings for home building. The building and loan, or savings and loan, might give a mortgage for three to five years. But as late as 1920, 60 percent of all homes occupied by the owner had no mortgage at all.Adam Smith, Paper Money, p69
The “Dark Age" Hudson mentions was accompanied by a widespread civilizational collapse with eerily similar parallels to today. Not only finacialization, which we discovered last time, but also widespread migrations, warfare, conflict, and climate change:
The Late Bronze Age that Cline is interested in stretches from about 1500 B.C. to 1100 B.C. The Bronze Age itself, as opposed to the Stone Age before it, begins somewhere around 3000 B.C. At that point, people developed sophisticated metallurgy techniques allowing them to mix copper and tin into an alloy — bronze — strong enough for serious sword blades and other goods. It is in the Bronze Age that city building, and the sprawling kingdoms they engendered, begins in earnest. Egypt of the pharaohs was a Bronze Age civilization as was the Babylonian empire.
It was the transport of copper and tin for bronze that helped establish complex trade networks. Grain and manufactured goods also became part of that transportation web. Alliances between city-states followed. In this way, the Egyptians, Hittites, Canaanites, Cypriots, Minoans, Mycenaeans, Assyrians and Babylonians became the economic powerhouses of the ancient world — what Cline calls the "Group of 8." Together they built the first version of a "global" culture using long-distance economic and military partnerships that required advanced — for its day — technologies.
So what took all these cultures down at the same time? ...a prolonged shift in climate was a factor in bringing down the Mediterranean Bronze Age ...
What followed were drought, scarcity and desperation...A letter from a commercial officer living in the starving, inland city of Emar begs the recipient in his hometown of Ugarit, in northern Syria, to bring aid quickly. "There is famine in your [i.e. our] house; we will all die of hunger. If you do not arrive quickly, we ourselves will die of hunger. You will not see a living soul ..." And with famine came migration and wars. The scourge of the era was the mysterious "Sea Peoples" who had swept across the region. According to Cline, it is likely that the marauding Sea Peoples came from the western Mediterranean and "were probably fleeing their island homes because of the drought and famine ... moving across the Mediterranean as both refugees and conquerors."
The wars took their own toll. "Be on the lookout for the enemy and make yourself very strong!" proclaims a letter to the King of Ugarit near the end. The warning appears to have arrived too late. Another letter tells of the army's humiliation. "The city was sacked. Our food in the threshing floors was burned and the vineyards were also destroyed. Our city is sacked. May you know it! May you know it!"
The world of the Egyptians, Assyrians and Babylonians was complex, in the technical meaning of the word. It was a system with many agents and many overlapping connections...complexity itself may have been the greatest threat to late Bronze Age civilization once the pressures began...Lessons From The Last Time Civilization Collapsed (NPR)
Sound familiar? Complexity and collapse. Inequality and debt slavery. Failed states. Climate change striking an already fragile system. Why do we refuse to learn from history?
The "Axial Age" was a time when great empires formed once again - the Roman Empire, the Parthians, the Mauryan Empire, the Han Dynasty. Million of unrelated people began coming into contact for the first time. This profoundly changed religion, from essentially 'tribal" gods designed to enforce ethnic solidarity to systems of thought designed to make sense of a changing, confusing world. It is thought this is when gods began to enforce morality, as in "god is always watching you," and ideas of being punished or rewarded in the next life were developed to keep people in line in places where the old social ties could no longer regulate behavior. We begin to see a distinction between a state (a political territory united under a set of uniform laws which collects taxes and has a monopoly on violence), and a nation (a collection of people with similar language, religion and culture), a distinction which troubles us to this day.
Religion wasn’t always based on morality, explains Nicolas Baumard, a psychologist at the École Normale Supérieure in Paris. For the first several thousand years of human recorded history, he notes, religions were based on rituals and short-term rewards. If you wanted rain or a good harvest, for example, you made the necessary sacrifices to the right gods. But between approximately 500 B.C.E. and 300 B.C.E., a radical change appeared all over Eurasia as new religions sprung up from Greece to India to China. All of these religions shared a focus on morality, self-discipline, and asceticism, Baumard says. Eventually these new religions, such as Stoicism, Jainism, and Buddhism, and their immediate successors, including Christianity and Islam, spread around the globe and became the world religions of today. Back in 1947, German philosopher Karl Jaspers dubbed the pivotal time when these new religions arose “the Axial Age.”
So what changed? Baumard and his colleagues propose one simple reason: People got rich. Psychologists have shown that when people have fewer resources at their disposal, prioritizing rewards in the here and now is the best strategy. Saving for the future—much less the afterlife—isn’t the best use of your time when you are trying to find enough to eat today. But when you become more affluent, thinking about the future starts to make sense, and people begin to forgo immediate rewards in order to prioritize long-term goals.
Not coincidentally, the values fostered by affluence, such as self-discipline and short-term sacrifice, are exactly the ones promoted by moralizing religions, which emphasize selflessness and compassion, Baumard says. Once people’s worldly needs were met, religion could afford to shift its focus away from material rewards in the present and toward spiritual rewards in the afterlife. Perhaps once enough people in a given society had made the psychological shift to long-term planning, moralizing religions arose to reflect those new values. “Affluence changed people’s psychology and, in turn, it changed their religion,” Baumard saysWealth may have driven the rise of today’s religions (Science Magazine)
This is the creation of "big gods" which played a role in complex human societies. Graeber spends quite a bit of time discussing how our modern ideas of morality evolved during this age of empires and the evolution of money and debt. The Axial Age is also a time of great inequality and cultural ferment. The collapse of the Axial Age empires may have been due to disease, climate change, migration, resource shortages, ecological devastation, soil erosion, and other factors.
According to David Graeber, in the long sweep of history, there is a constant transition between periods of credit money and coin money. Coin money coincides with periods of elite control, and also with warfare and slavery; in fact Graeber terms it the "military-coinage-slavery complex." Credit money, by contrast allows decentralized money and local control. It also eliminates the artificial scarcity caused by commodity money (no doubt this is something of an oversimplification):
...Eurasian history, taken in its broadest contours, shifts back and forth between periods dominated by virtual credit money and those dominated by actual coin and bullion. The credit systems of the ancient Near East give way to the great slave-holding empires of the Classical world in Europe, India, and China, which used coinage to pay their troops. In the Middle Ages the empires go and so does the coinage – the gold and silver is mostly locked up in temples and monasteries – and the world reverts to credit. Then after 1492 or so you have the return world empires again; and gold and silver currency together with slavery, for that matter.What is Debt? – An Interview with Economic Anthropologist David Graeber (Naked Capitalism)
One thing I learned from Graeber is that the relative importance of money and credit seems to have waxed and waned over time. Money (in particular, coinage) emerged around 800BC and remained significant until about 600AD, an era associated with many great empires, and the associated need to pay transient professional armies. With the collapse of the great empires, new states emerged, increasingly under the regulation of religious authorities. Coinage declined in importance, with credit systems taking over (600AD-1450AD). This latter observation is consistent with the general decline of urban areas in western Europe, but Graeber points to many other factors as well. Monetary exchange waxes once again with the age of the "great capitalist empires" (1450-1971AD).Debt: The First 5000 Years (MacroMania)
Indeed, the military-coinage-slavery complex was a central engine of the expansion of the ancient Roman Empire. In particular, slaves from the Punic wars and silver from Spain:
Sources of the Roman Republic’s Development:
Firstly, there were the stupendous amounts of bullion entering the economy as a result of booty from conquered territories, indemnities from subdued border states, and from taxes paid by newly acquired provinces. However, this vast increase (from around 5,000 talents over the whole 3rd Century BC to over 45,000 talents in merely the first half of the 2nd Century BC) does not appear to have caused any inflation (except perhaps among some luxury items).
Secondly, there was even more bullion from Spanish silver mines acquired as a result of the 2nd Carthaginian War. Like the other sources of bullion, it’s worth noting that these also passed through political hands first, with the mines essentially being contracted-out state-owned enterprises.
There was also an increased level of trade from essentially having a pan-Mediterranean free trading zone. Ports like Delos in particular appear to have become major economic hubs. Around the middle of the 2nd Century BC the Romans also started using the bilge pump, allowing for even larger ships and boosting trade further. At the same time, the evidence from shipwrecks suggests that Italy became an increasingly specialised exporter of oil and wine to the rest of the Empire.
At the same time, conquest was bringing in vast numbers of slaves. From the time of Hannibal (c.200 BC) to that of Julius Caesar (c.50 BC) the Italian population’s proportion of slaves expanded from around just 6% to a whopping 21%. Compared to freemen, slaves could be worked hard or given technical skills with no corresponding increases in wages. So this boost in the relative number of slaves would have also boosted overall labour productivity.
With all this bullion sloshing around, and with new opportunities for trade and production, a banking sector emerged to put that bullion to good use. This all goes some way to explaining why there was little-to-no inflation: the number of opportunities for economic expansion far outstripped the amount of money and credit.
So what went wrong?
...In 88 BC Mithridates of Pontus invaded the province of Asia (i.e. modern-day Turkey) and destroyed that major commercial hub I mentioned earlier: Delos. This shock was seemingly too much for the Mediterranean banking system, with a financial crisis back in Rome as repayments stopped and credit dried up. In fact, the banking system appears to have never recovered. Dr Kay estimates that the result was real GDP per capita growth of around 0.54% per annum between 150 and 50 BC, meaning that real GDP per capita grew by 72% taking the century as a whole. Such gains, like with today’s economic growth, were unevenly spread. The wealth of the elite grew by around 500%, while non-elite wealth grew by only 77%.
The result is reminiscent of the global economy in the period between 2001 and 2007, where a period of sustained economic growth was followed by a credit crunch and recession. Kay himself draws this parallel. In recounting a passage of Cicero’s that outlines how the Roman ‘credit and this system of monies… is linked with, those Asian monies; the loss of one inevitably undermines the other and causes its collapse’ Kay suggests substituting ‘US sub-prime’ for ‘the Asian monies’ and ‘UK banking system’ for ‘the system of monies’.
Yet there is one important difference between the two episodes. Unlike their ancient counterparts policy-makers in 2008 (by and large) responded effectively to the crisis. Central banks cut interest rates, governments enacted fiscal stimuli and organisations such as the WTO and IMF helped ensure that international trade continued. As Professor Daniel Drezner of Tufts University puts it in his recent book: The System Worked. The support of banks and the financial system was vital in this. While the profits of the financial sector took a hit, and pay and employment decreased, many top executives continued to be paid six figure bonuses. The alternative, as Rome’s experience will show, could have been much worse.
In the same year that the crisis began the consuls Sulla and Pompeius Rufus passed a law that allowed partial repayment of debts and capped interest rates. Later Sulla confiscated the properties of prominent Roman citizens, an act which drove down property values, further undermining the balance sheets of the battered banks. There were similar actions taken in response to later crises which meant that credit remained tight for the remainder of the first century. Politically, the populist response of the Republican elite, in further damaging the Roman economy, hastened the demise of the Republic. Today’s leaders would be wise to heed the dangers of pandering to populist sentiment.
In AD 33 Tiberius took one of the few prudent steps to address an economic crisis when he stimulated lending through interest free loans, something that Kay describes as ‘functionally the same as what we would call quantitative easing’. Ironically today’s quantitative easing is held responsible for inflating asset values and generating wealth for financiers and the rich alike.Economic Growth in Ancient Rome (Capitalism's Cradle)
The Roman Republic holds a salutary lesson: during a crisis, support for the financial system is often necessary to stave off a full-blown depression. It is likely that during the next crisis we’ll find ourselves supporting the modern-day argentarii again.
Bankers' Bonuses, Roman Style (History Today)
Interesting opinion in the above article. The system worked? The alternative could have been much worse? Perhaps the author is unaware of what happened to the Roman Empire in the end. The level of inequality in the Roman empire was unsustainable:
...historians Walter Schiedel and Steven Friesen pored over papyri ledgers, previous scholarly estimates, imperial edicts, and Biblical passages. Their target was the state of the economy when the empire was at its population zenith, around 150 C.E. Schiedel and Friesen estimate that the top 1 percent of Roman society controlled 16 percent of the wealth, less than half of what America’s top 1 percent control.
In total, Schiedel and Friesen figure the elite orders and other wealthy made up about 1.5 percent of the 70 million inhabitants the empire claimed at its peak. Together, they controlled around 20 percent of the wealth.
These numbers paint a picture of two Romes, one of respectable, if not fabulous, wealth and the other of meager wages, enough to survive day-to-day but not enough to prosper. The wealthy were also largely concentrated in the cities. It’s not unlike the U.S. today. Indeed, based on a widely used measure of income inequality, the Gini coefficient, imperial Rome was slightly more equal than the U.S.Income inequality in the Roman Empire (Per Square Mile)
By contrast, the Medieval period when the centralized power of the Western Roman Empire disintegrated, power was decentralized and money once again reverted to credit. Usury was banned, and Manorialism - self-sufficient economic units - was the primary economic arrangement in the wake of the Roman empire's disintegration. Trade declined, and some of the Classical knowledge was lost for centuries (concrete, wheel-turned pottery, etc.).
We tend to think of the Middle Ages as something that happened in Western Europe characterized by small kingdoms full of feudal lords, serfs, and knights. The patterns were much more widespread than that. Western Europe was actually one of the last places to exhibit the important characteristics of the Middle Ages. Everywhere Empires with strong centralized governments and expansionist military policies declined or disappeared and in their place smaller societies emerged. Axial Age religions rose in prominence as the new keepers of cultural continuity.
The “decline” of empires is usually thought of as a descent from civilization into a “dark ages” but the truth is the reverse for most of our species. Life for serfs in the Middle Ages wasn’t peachy, but it was positively luxurious compared with the lives of slaves, debt-bondsmen, or war-captives during imperial times. The demands of a feudal lord may have been onerous, but they were mild compared with the demands of maintaining a Roman or Chinese city. Urban areas declined because the military apparatus for extracting resources from the countryside no longer existed.Debt: The Middle Ages (Two Friars and a Fool)
The Middle Ages also meant the return to prominence of a credit economy. As previously discussed barter isn’t really what happens in the absence of coinage. After the Roman Empire dissolved and coins were no longer being minted, trade continued being calculated in the familiar units. Money just became virtual again. Coins, after all, are principally useful to governments as a tool for creating markets through taxation, and bullion is really a military tool.
One fascinating aspect of the economic changes of the Middle Ages was the vociferous opposition to usury, often regarded as the worst of all evils. In many ways the critique of the Axial Age religions of the greed and violence of empire became the normative position of the Middle Ages. It could be said that in Europe, for example, the Church played a role in destabilizing the Roman Empire with economic criticism, and when the Church became the new institutional stabilizer the role it took was partly about guarding against a return to Roman decadence.
This really goes against the narrative we are usually taught about this period of history. We are usually taught that things got worse for everyone in the Middle Ages and that the Church mainly clung to the vestiges of Roman power and prestige. We are used, for example, to hearing a lot of criticism of extravagance in Church architecture. But one thing that the Church was doing was removing bullion from the market to guard against usury. Gold in Cathedrals is gold that is not circulating and building interest. When people donated precious metals to the Church they were, in part, attempting to live out the command to store up wealth in heaven, rather than on earth. In return, the Church ensured that usury and debt-bondage remained strictly forbidden. A serf may have owed their fealty to their lord, but they were not their lord’s property. The lord couldn’t sink them into debt and then sell them to a neighboring lord.
This coincided with a period of benign climate, the Medieval Warm Period. This, along with a series of technological innovations (the horse-driven plow, the waterwheel, three-field crop rotation, horseshoes) brought about a population increase. Europe began to clear the forests of the East. Eventually, famine and plague would strike in the 1300's, wiping out perhaps a third or more of Europe's population.
The decrease in expansion rising from the growth of economic institutionalization was accelerated by a number of other factors. One of these was a fall of prices after 1300, accompanied, within a half century, by a scarcity of labor. The fall of prices probably began with the decrease in demand arising from institutionalization, but it was greatly accelerated by the scarcity of bullion.
By the year 1300 the accessible silver mines and scanty gold reserves of Europe had been systematically exploited for about four centuries and most of the easily obtained bullion had been extracted. Mines were becoming exhausted or were going deeper than could be operated by the available technology. The problem of keeping water out of the deeper mines was rapidly becoming insoluble. The ordinary lift pumps known at the time would not take water higher than about thirty feet, since they worked by air pressure, so that depths greater than this had to be pumped out in multiple stages. Problems of ventilation and of removing ores were also rising rapidly. As a consequence, after about 1320 the annual increase in the bullion supply and thus the increase in the volume of money were less than the increase in the production of goods, and the long rise in prices was reversed. Costs, particularly wages, did not fall so rapidly as prices, with the result that profit margins (price minus costs) were reduced or wiped out completely. This discouraged production.
The situation was alleviated for a short time just at the middle of the fourteenth century because the outbreak of the Hundred Years' War in 1338 helped to strengthen prices, but profit margins hardly benefited at all, because the shortage of labor resulting form the Black Death after 1348 raised wages. Even today, when wages constitute a smaller production of total costs, nothing will curtail production faster or more completely than rising wages at a time of falling prices. One rather paradoxical consequence of this situation was that incomes were distributed somewhat more equitably, and the standard of poorer groups frequently improved in spite of the general economic decline. This meant that aggregate incomes as a whole, were decreasing, but the share of total income going to the working people was rising and the share of the upper classes was falling quite rapidly.Caroll Quigley, The Evolution of Civilizations, pp. 364-365
In other words, credit money along with a scarcity of labor caused a more equal society and higher living standards for the average person. We even see health measures improve for the poorest survivors during this time.
In the Medieval period, because of the lack of usury and credit money, wealth could not be hoarded (except, perhaps, by the church). Money was plowed into useful things, including the great works of architecture we see today. Expansion and growth were not priorities. Local economies flourished:
Grain-based Local Currency refers both to a form of monetary unit, and to one of the earliest economic systems to supplant pure barter. In such a system, money is minted/printed to correspond with the harvest - essentially each dollar (or whatever your monetary units are called) is a share of the recent local harvest. You actually have the option of redeeming your money for wheat or rice or whatever the local crop is.
Unlike gold, the grain could rot, be eaten by rats, etc. The result was that you'd have huge influx of money into the system around harvest time, and then a rush to spend the money and get as much done with it as possible before it went bad. Hoarding cash wasn't a possibility - money you hoarded would devalue fairly quickly. So, money would be spent just as quickly, wages tended to be pretty good, and the harvest would be followed by a flurry of improvements to property and similar investments that would retain their value longer than the grain did. Money would change hands many times over a short span of days - last week I was a harvester, but this week I'm on the team that's building the new church.
It's this economy that made most of the great Cathedrals of Europe - they weren't built by Royalty or the Vatican, they were built by seasonal windfalls within the local communities.
Within a given community, the gaps between the rich and the poor were significantly smaller than we see today. Eventually, however, this system was undermined by the actions of Kings and Banks. National currencies supplanted local currencies, and the money became concentrated in the hands of the few.Grain-based Local Currency (Arcana Wiki)
In this period loans were extended primarily to monarchs and merchants (who were the only ones who could command a surplus to pay them back). Specie money was used by monarchs, merchants, and the church. Banking began as a way to fund trade and warfare. This necessitated the development of Lombard Banking. Money flowed into Italy, funding the Renaissance (also fueled by fleeing refugees from the Muslim conquest of Constantinople in 1453). Trade voyages of Italy began the commenda, a business organization formed in the 10th century with limited liability that was generally used for financing maritime trade, along with the development of double-entry bookkeeping using Arabic numerals (which had actually been known in ancient Mesopotamia).
As early as the thirteenth century, innovative practices had been developed to deal with unpredictable and unreliable cash flows experienced by large institutions and governments. Interest could not be charged directly on loans, because of religious restrictions on charging interest. So forward contracts were used in the wool market between monasteries in England and Italian merchant societies, where cash loans would be repaid in wool. Religious communities also pioneered their own pension schemes.
At the heart of the new medieval financial industry was merchant banking, including government finance. Edward I had an early form of current account with the Ricciardi of Lucca that incorporated an extensive overdraft facility, so he could fund the armies and castles that helped conquer Wales. To meet Edward's demands, the Ricciardi could raise additional funds from other merchant societies across Europe, in the same way as modern banks turn to the interbank lending markets.A medieval take on financial woe (BBC)
"All this demonstrates"... "that medieval merchants, using abaci and roman numerals, were just as capable of calculating forward prices and interest as modern financiers using mathematical models and computer spreadsheets". But this system could be thrown into disarray by credit crunches like one in 1294, which "shares remarkable parallels with today's difficulties - the main cause being a lack of liquidity in the money market".
After a period of easy money in the 1280s, major financial players including the Pope called in their money, the French king levied a huge tax on the Italian merchants in France, and war broke out between England and France in 1294. So when Edward I called on his bankers to raise the money needed to fund his armies, the Ricciardi were caught unprepared. Normal markets and communications seized up in the crisis conditions. "It seems that money has disappeared" said the Ricciardi, just like a modern banker complaining that everyone has stopped lending.
When the Ricciardi could not come up with the money, Edward in effect froze all of their assets in England, and did the same to all other Italian merchant societies...The Ricciardi were in effect bankrupted by the crisis of 1294, and they were followed by a string of other leading banks.
After the European arrival in the New World, Spanish silver from Potosí began pouting into the Old World causing a vast inflation historians term the Price Revolution. Governments became more centralized and powerful, in large part due to advances in warfare, as Carroll Quigley points out:
The next step forward in the development of the political level reduced the number of European political units from hundreds to scores and gave us a new state in political development to which we apply the name "dynastic monarchy." The military factor that contributed to its growth was the rise of artillery that made the private stone castle obsolete, since guns could shatter the walls of a castle and thus force its owner to submit. Artillery first appeared around 1325, but its effects were not clearly evident for two hundred years. Then they became so clear that when a great lord wanted a residence built after 1530 he built a palace rather than a castle. In this way, at the price of political submission to the royal artillery, the lord obtained and indefensible, but much more comfortable, residence at lower cost.
The number of lords with the financial and economic resources to obtain artillery was, of course, much less than the number who had mercenary men-at-arms, so that the former could enforce obedience from the latter. Political units became fewer in number and larger in area. The possession of artillery became the dividing line between public authority and private power, and later between possession of castles and the lack, as well as between the possession of a royal title and its lack. All these served to demark a period of "dynastic monarchy" in the political level at the rough date of 1500.Caroll Quigley, The Evolution of Civilizations, pp. 357-358
As the number of states fell and power began to be consolidated in fewer and fewer hands, once again bullion money became important, as it was used to fund the mercenary armies of the "Cabinet Wars" of European princes. In the Holy Roman Empire, the "Kipper und Wipperzeit," caused by a debasing of metal coins, began the history of financial crises which have continued to this day. As an article on that financial crisis point out:
The period preceding and including the early 1600s was marked by a fundamental shift from feudalism to capitalism, from medieval to modern times, and from an economy driven by self-sufficiency to one driven by markets and money. It is within this social and economic context that various states in the Holy Roman Empire attempted to finance the Thirty Years’ War by creating new mints and debasing subsidiary coins, leaving large-denomination gold and silver coins substantially unaffected.Crisis Chronicles: 300 Years of Financial Crises (1620–1920) (Liberty Street Economics)
During this age, states turn to Mercantilism, which is in essence attempting to manage trade such that you end up with the greatest amount of gold by strengthening state power over trade. Mercantilism is the economic counterpart of the dynastic monarchy. Aristocratic attempts to control trade and maintain their rentier privileges gave rise to the economic philosophy of classical Liberalism (i.e. to "liberate" trade from aristocratic and elite prerogatives), as Michael Hudson points out. And, of course the vast plundering of the New World and European Colonialism led to both the modern-day corporation and the philosophy of permanent growth, expansion, and productivity which is the guiding principle of the modern world.
The first modern corporation (the Dutch East India Company) and publicly-traded stock market (the Amsterdam stock exchange) emerge in the Dutch Republic at the beginning of the 1600's. The Dutch East India company even minted its own coins. William of Orange brings these banking innovations to England, along with a huge debt from funding his conquest of the throne. This debt circulates as money, and the Bank of England is created to manage it. This money financed the Industrial Revolution. By contrast, France's experiment with paper money (backed by land values) at the beginning of the 1700's under John Law ends in disaster and collapse, setting the stage for revolution half a century later. Patrimonial states eventually give way to the modern, impersonal state after the French Revolution. Eventually, the king's credit gets transferred to the state, with the private banks retaining the ability to create and manage the state's money. The idea that money is debt (specifically, the state's debt), is crucial to understanding the modern world. This is really a holdover from patrimonial states and double-entry bookkeeping.
The Little Ice Age, possibly caused by vast areas of the America reverting to forest after the dieoff of the American peoples, caused another shift in Europe. Increased demand for heating caused the forests to be chopped down, and a population boom resulted from New world crops such as the potato. Wood became expensive and scarce. Heating needs competed with industrial needs. Eventually, England turned to coal. England's coal was called "sea coal" because it was mined near the sea. To keep the mines from flooding, Thomas Newcomen developed a coal-powered pump that converted combustion into mechanical energy. You may be familiar with the results of that.
I'll end with the marvelous conclusion to Adam Smith's book Paper Money:
We think of the Arabs as taking our money, as holding us up for oil; a thousand years ago they gave us something even more valuable and more necessary than oil: numbers. They brought from India the ingenious tool called the zero, as well as the numbers we now call "arabic," 1, 2, 3, 4,5,6,7,8,9.
In the thirteenth century a traveler from Pisa, one Leonardo Fibonacchi, brought the numerical system to Tuscany in northern Italy, which enabled the Tuscans to have books that did not multiply CXXV by MCMXXXIII; they could have complex accounts, double-entry bookkeeping, system. The Tuscans developed banks, with bills of exchange, credit notes, like medieval traveler's checks, so that the traveling merchants did not have to carry cash.No it's not. We're a long way from the end of history.
Soon the Tuscans and the Florentines and the Venetians are banking all over southern and middle Europe, and then this particular geist or spirit goes fluttering over the Alps to Holland, because the Spaniards have conquered the southern part of the Netherlands and burned all the farms and the Dutch refugees have moved into Amsterdam, with cousins in cities around Europe, and when the boom starts in Europe there is an energy crisis, which consists of everybody chopping down an the trees of southern Europe for fuel, so many trees that the glassmakers are forbidden to build fires to make glass, and the Dutch take to the water and sail to the Baltic for more wood to solve the energy crisis with the trees from Finland and Sweden. And, as James Burke has written, the Dutch soon monopolize the wood trade, turning adversity to advantage, and their little ships are taking the wood south and the wine north, and pretty soon Amsterdam is the richest city in Europe, all this trade financed by the pieces of paper adapted from the northern Italians with the numbers on them brought by the Arabs from India.
The British take to the sea, too, raising the money on their lands, using the system brought by the French, remember the mort-gage, and the geist is getting a boost from John Calvin, who is preaching that work, successful work, gives you a glimpse of whether you are in a state of grace. The Dutch ships sail on to America, where the Dutchmen buy an island owned by the Manhattan Indians, and build a wall across the northern boundary ot their little settlement, and the muddy path along the wall is, naturally, Wall Street. When the British have had enough of the Catholic Stuart kings, they send to Holland for the handiest Protestant., the Prince of Orange and Nassau, and then they not only William and Mary as rulers, but they also have the Dutch coffeehouse crowd that comes along with William and is soon mixing it up with the English coffeehouse crowd. You can find all the shipping news in these coffeehouses, you can borrow money, lend money, invest money, hear music, drink coffee, meet girls, meet men, everything. The Dutch ships and the English ships are away a long time sometimes (their hulls, classified by risk and soundness, with a system in the coffeehouse known as Lloyd's), their cargoes financed by the pieces of paper called bills of credit, the money raised by mort-gage on the newly registered lands of England, the bills themselves deriving from the ones used by the Hollanders taken from the northern Italians with the numbers on them brought by the Arabs from India.
The Russians have been in the story before, too. The Russians want a warm-water port, so they march across Finland, which ruins the wood trade Duiit by the Dutch to solve the energy crisis. Europe needs not only the wood for fuel and ships, it is having trouble with Teredo navalis, a little water mollusk that eats the hulls of the wooden ships, but if the hulls are coated with tar and pitch from pine trees, Teredo navalis can't eat them. Now the Russians have the Baltic pine forests, and so the handiest place to get the tar and pitch is from the pine forests of the Carolinas, which is how the North Carolinians got to be known as Tarheels, though that nickname comes later, and more ships sail the Atlantic. New Amsterdam becomes New York, the Puritans become Yankee traders, and to trade in the pieces of paper, they meet under a button-wood tree in 1692 which shades the muddy path known as Wall Street, and they call the area right under the tree the Stock Exchange.
With all this shipping going on, there are a lot of bills of credit floating around, upon which you can raise cash until your ship comes in, and to organize this procedure an informal association has been meeting in London, in the Nag's Head saloon, on Cateaten Street, down the road from the coffeehouses. In 1694 they need a better name for the association, and so they call it the Bank of England. One day on Cateaten Street, the boys are sitting around in the Nag's Head, and somebody says, "Who do you think should be the next Master of the Mint?" Another fellow says, "What about Isaac Newton? He's paid his dues." Another fellow says, "Isaac Newton'? The Isaac Newton from Cambridge, with the math formulas and the papers about optics and light? Isn't he a little strange about gold?"
Meanwhile, in a tavern in New York . . . but wait a minute. This is where you came in. You know enough of the rest of the story. It helps to remember, on our dour days, what a long story it is, what a marvelous adventure. It's not over yet.
Next time: conclusions and implications.