IDEAS home Printed from https://ideas.repec.org/p/tor/tecipa/munro-01-02.html
   My bibliography  Save this paper

The Origins of the Modern Financial Revolution: Responses to Impediments from Church and State in Western Europe, 1200 - 1600

Author

Listed:
  • John H. Munro

Abstract

The basic thesis is that the modern 'financial revolution', usually dated to eighteenth century England, but far more properly to the sixteenth-century Netherlands, in terms of those institutions for both government finance (borrowing) and international finance (bills of exchange), owed its essential origins to the impediments of Church and State that reached their harmful fruition in the later thirteenth and early fourteenth century. The major obstacle that came 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 in the thirteenth century. The major obstacles that the State provided, with the spreading stain of ever more disruptive international warfare from the 1290s, was the development of nationalistic bullionist philosophies and of monetary-fiscal policies (to finance warfare) that 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 the loans, but the sale of interest-bearing debt certificates in secondary markets. The alternative solution, found elsewhere - first in Flemish towns from the 1270s -- 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, for one or more lifetimes (lijfrenten, erfelijkrenten). These were not loans, and hence they were not usurious, because the buyer of rentes had no expectation of repayment (unless the government chose to redeem them); instead they represented the purchase of a future stream of income, either lifetime or perpetual (heritable). 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 1437, 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.

Suggested Citation

  • John H. Munro, 2001. "The Origins of the Modern Financial Revolution: Responses to Impediments from Church and State in Western Europe, 1200 - 1600," Working Papers munro-01-02, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:munro-01-02
    as

    Download full text from publisher

    File URL: https://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-MUNRO-01-02.pdf
    File Function: MainText
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hugh Rockoff, 2003. "Prodigals and Projecture: An Economic History of Usury Laws in the United States from Colonial Times to 1900," NBER Working Papers 9742, National Bureau of Economic Research, Inc.
    2. Reed, Clyde G. & Bekar, Cliff T., 2003. "Religious prohibitions against usury," Explorations in Economic History, Elsevier, vol. 40(4), pages 347-368, October.

    More about this item

    JEL classification:

    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • N2 - Economic History - - Financial Markets and Institutions
    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation
    • P5 - Economic Systems - - Comparative Economic Systems

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tor:tecipa:munro-01-02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePEc Maintainer). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.