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The medieval origins of the 'Financial Revolution': usury, rentes, and negotiablity

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  • Munro, John H.

Abstract

The basic thesis of this article is that the essential origins of the modern ‘financial revolution’ were the late-medieval responses, civic and mercantile, to financial impediments from both Church and State, concerning the usury doctrine, that reached their harmful fruition in the later thirteenth and early fourteenth century. That ‘financial revolution’, in terms of those national institutions for government borrowing and international finance, involving negotiable securities, in the form of annuities or rentes, and bills of exchange, is generally thought to have originated in eighteenth century England; but as James Tracy has earlier shown it first took place, on a fully national basis, in the sixteenth-century Habsburg Netherlands. The major obstacle from the Church was of course the usury doctrine, and more accurately the final evolution of this doctrine in Scholastic theology and canon law, along with the intensification of the campaign against usury from the early thirteenth century. The major obstacles that the State provided, with the spreading stain of ever more disruptive international warfare from the 1280s, were the nationalistic bullionist philosophies and related monetary-fiscal policies (to finance warfare) that together hindered the international flow of specie in later medieval Europe. For public borrowing, one must begin with the contentious policies of Venice, Florence, and other Italian city states in basing their finances on forced loans, which did pay interest, and thus with the usury controversies that erupted, over not just such loans, but the sale of interest-bearing debt certificates in secondary markets. The alternative solution, found elsewhere – first in northern French towns from the 1220s -- and one that would govern European public finance up to the nineteenth century, was to raise funds for urban governments through the sale of rentes, both life-rents (one or two lives) and hereditary or perpetual rents. These were not in fact loans but annuities, and hence they were not usurious, because the buyer of such rentes had no expectation of repayment (unless the government chose to redeem them); instead they represented the purchase of a continuous future stream of income (for at least one lifetime). Those rentiers who sought to regain some part of their invested capital had only one recourse: to seek out buyers in secondary markets. The true efficiency of modern public finance also rested upon the development of such markets and thus upon the development of full-fledged negotiablity; and public finance also depends upon satisfactory instruments to permit low risk, low cost international remittances. The solution to both problems lay in the development of the negotiable bill of exchange. Such bills, at first non-negotiable, emerged in the late thirteenth century as a response to circumvent not only the usury doctrine (to ‘disguise’ interest payments in the exchange rate) but also the almost universal bans on bullion exports. Yet another barrier that medieval English merchants faced was the virtual absence of deposit-banking because of the crown’s strict monopoly on the coinage and money supply, so that the usual origin of such banking, in private money-changing, was unavailable. Although English merchants sought remedies by using transferable commercial bills, they were not truly negotiable, for they had no legal standing in Common Law courts. But from the late thirteenth century, the Crown was incorporating the then evolving international Law Merchant into statutory law, and it also established law merchant courts, which did give such financial instruments some legal standing. In 1436, a London law-merchant court was the first, in Europe, to establish the principle that the bearer of a bill of exchange, on its maturity, had full rights to sue the ‘acceptor’ or payer, on whom it was drawn, for full payment and to receive compensation for damages. From that precedent, and then from those provided by similar law-merchant court verdicts in Antwerp and Bruges (1507, 1527), the Estates General of the Habsburg Low Countries (1537-1541) produced Europe’s first national legislation to ensure the full legal requirements of true negotiability – including the right to sue intervening assignees to whom bills had been transferred in payment. These Estates-General also legalized interest payments (up to 12%), thus permitting open discounting, another obviously essential feature of modern finance, private and public. Antwerp itself, with the foundation of its Bourse in 1531, became the international financial capital of Europe, especially as a secondary market in national rentes – the very instrument that became the foundation of English public finance, in the form of annuities, from the 1690s.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10925.

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Date of creation: Feb 2002
Date of revision: Sep 2002
Publication status: Published in The International History Review 3.25(2003): pp. 505-562
Handle: RePEc:pra:mprapa:10925

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Keywords: loans; annuities; rentes; public debts; town governments; Italy; Spain; France; the Netherlands; England; usury; interest; canon law; bills of exchange; Glorious Revolution; Consolidated Stock of the Nation;

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  1. Pamela Nightingale, 1990. "Monetary contraction and mercantile credit in later medieval England," Economic History Review, Economic History Society, vol. 43(4), pages 560-575, November.
  2. Munro, John H., 2000. "The 'New Institutional Economics' and the Changing Fortunes of Fairs in Medieval and Early Modern Europe: the Textile Trades, Warfare, and Transaction Costs," MPRA Paper 11029, University Library of Munich, Germany, revised Feb 2001.
  3. Hoffman, Philip T. & Postel-Vinay, Gilles & Rosenthal, Jean-Laurent, 2001. "Priceless Markets," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226348018, June.
  4. repec:cup:jechis:v:61:y:2002:i:03:p:593-615_03 is not listed on IDEAS
  5. John H. Munro, 1999. "The Low Countries' Export Trade in Textiles with the Mediterranean Basin, 1200-1600: A Cost-Benefit Analysis of Comparative Advantages in Overland and Maritime Trade Routes," Working Papers munro-99-01, University of Toronto, Department of Economics.
  6. Ekelund, Robert B, Jr & Hebert, Robert F & Tollison, Robert D, 1989. "An Economic Model of the Medieval Church: Usury as a Form of Rent Seeking," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(2), pages 307-31, Fall.
  7. Carlo M. Cipolla, 1964. "Economic Depression of the Renaissance?," Economic History Review, Economic History Society, vol. 16(3), pages 525-527, 04.
  8. Ekelund, Robert B. & Hebert, Robert F. & Tollison, Robert D. & Anderson, Gary M. & Davidson, Audrey B., 1997. "Sacred Trust: The Medieval Church as an Economic Firm," OUP Catalogue, Oxford University Press, number 9780195103373, September.
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  10. Quinn, Stephen, 2001. "The Glorious Revolution'S Effect On English Private Finance: A Microhistory, 1680 1705," The Journal of Economic History, Cambridge University Press, vol. 61(03), pages 593-615, September.
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Citations

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Cited by:
  1. Lars Boerner & Oliver Volckart, 2010. "The utility of a common coinage: currency unions and the integration of money markets in late medieval Central Europe," Economic History Working Papers 29409, London School of Economics and Political Science, Department of Economic History.
  2. David Chilosi & Oliver Volckart, 2009. "Money, states and empire: financial integration cycles and institutional change in Central Europe, 1400-1520," Economic History Working Papers 27884, London School of Economics and Political Science, Department of Economic History.
  3. Jaco Zuijderduijn & Tine De Moor & Jan Luiten van Zanden, 2011. "Small is beautiful. On the efficiency of credit markets in late medieval Holland," Working Papers 0011, Utrecht University, Centre for Global Economic History.
  4. Casson, Catherine & Fry, J. M. & Casson, Mark, 2011. "Evolution or revolution? a study of price and wage volatility in England, 1200-1900," MPRA Paper 31518, University Library of Munich, Germany.
  5. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "Some thoughts on accurate characterization of stock market indexes trends in conditions of nonlinear capital flows during electronic trading at stock exchanges in global capital markets," MPRA Paper 49921, University Library of Munich, Germany.
  6. Michele Fratianni & Franco Spinelli, 2006. "Did Genoa and Venice Kick a Financial Revolution in the Quattrocento?," Working Papers 112, Oesterreichische Nationalbank (Austrian Central Bank).
  7. David le Bris & William N. Goetzmann & Sébastien Pouget, 2014. "Testing Asset Pricing Theory on Six Hundred Years of Stock Returns: Prices and Dividends for the Bazacle Company from 1372 to 1946," NBER Working Papers 20199, National Bureau of Economic Research, Inc.
  8. David Chilosi, 2013. "Risky institutions: political regimes and the cost of public borrowing in early modern Italy," Economic History Working Papers 50815, London School of Economics and Political Science, Department of Economic History.
  9. Munro, John H., 2006. "South German silver, European textiles, and Venetian trade with the Levant and Ottoman Empire, c. 1370 to c. 1720: a non-Mercantilist approach to the balance of payments problem, in Relazione economic," MPRA Paper 11013, University Library of Munich, Germany, revised Jul 2006.
  10. William Goetzmann, 2003. "Fibonacci and the Financial Revolution," Yale School of Management Working Papers ysm432, Yale School of Management, revised 01 Mar 2004.
  11. Casson, Catherine & Fry, J. M., 2011. "Revolutionary change and structural breaks: A time series analysis of wages and commodity prices in Britain 1264-1913," MPRA Paper 27866, University Library of Munich, Germany.
  12. Munro, John H., 2005. "I panni di lana: Nascita, espansione e declino dell’industria tessile di lana italiana, 1100-1730
    [The woollen cloth industry in Italy: The rise, expansion, and decline of the Italian cloth indus
    ," MPRA Paper 11038, University Library of Munich, Germany, revised Sep 2006.
  13. John H. Munro, 2009. "Coinage and Monetary Policies in Burgundian Flanders during the late-medieval 'Bullion Famines',. 1384 - 1482," Working Papers tecipa-361, University of Toronto, Department of Economics.
  14. Munro, John H., 2007. "The usury doctrine and urban public finances in late-medieval Flanders (1220 - 1550): rentes (annuities), excise taxes, and income transfers from the poor to the rich," MPRA Paper 11012, University Library of Munich, Germany, revised Jan 2008.

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