Money Credit Banking Middle Ages

The Development of New Ideas About Money During the Later Middle Ages

Money, Credit, and Banking

What Aquinas had to say on economic matters was largely in the nature of ethical recommendation rather than a critical de­scription of economic processes. The stability and self-sufficiency of the period of feudalism might have found the just price and non-interest bearing loans sufficiently practical to serve as work­ing principles; but in the very century in which Aquinas lived, the Thirteenth, commerce and trade with their demands for money and credit were swinging into a rapid tempo. In spite of the toll houses, the laws against trade, the opposition of the church and the arbitrary restrictions of feudal lords, the small band of traders, many of them Jewish, which moved across Europe during the Middle Ages now swelled into a mighty throng of merchants. Strangely enough, conditions which at first retarded the flow of commerce were in the end responsible for many of the instruments of trade which are now held indispensable. The absence of an abundant supply of money led to the rapid growth of money-lending agencies, and according to tradition at least, the Christian prohibitions against lending at interest had the ef­fect of giving to the Jews this whole economic function. Buying and selling between cities which lacked a common currency and adequate police to give the merchants protection led to the re­vival of the bill of exchange. Although its origin is unknown, the bill of exchange was used in the Italian commercial cities before the invading Arabs destroyed their sea-borne trade with the cities of the Eastern Mediterranean. Once brought back into use by the development of European trade, it has continued as an essential element of modern business. The operation of a bill of exchange is simple; it requires only that persons of wealth in different cities be known to each other and agree to act in trust and confidence with each other. Given these conditions, suppose a buyer of mer­chandise wishes to journey to a distant city to purchase goods. Since police protection is meagre, and restrictions against the ex­portation of money numerous, the merchant would rather not risk carrying a large sum of money on his person. He therefore goes to a resident of his city known to have acquaintances in the city to which he is going. Paying the necessary money, the trav­eller receives a letter authorizing the wealthy friend to give the traveller a similar sum when he calls for it. This essentially is the way a bill of exchange operates. Of course, the settlement be­tween the two friends, or bankers, is an important matter, but it does not need to be described here. Suffice it to say that since the relationship between the bankers is reciprocal, many of their transactions over a period of time will cancel out, leaving only a small balance, if any, to be settled in cash.

Another of the practical developments of the later Middle Ages which gave rise to important new factors in economic life was the formation of the Hanseatic League. This was the name taken by a group of cities centering around the Baltic and North seas which bound themselves together for mutual aid in carrying on commerce and trade. The word hanse is a germanic term simi­lar to the modern idea of corporation. The power of these cities was great. They cleared the sea of pirates, deposed monarchs who continued useless restrictions against trade, forced large areas into commercial bondage, and admitted powerful cities to the advantages of their association only on payment of heavy fees. The ships of the League were known in the Mediterranean as far east as Syria; warehouses and banks were established in London in the League's name; and branches grew up in the interior of Europe. Apparently only the lack of a strong central authority prevented this loose knit association of cities from a firm and well nigh perpetual monopoly of European commerce.

Out of the conflicts between the league and rising native merchants in England and Belgium came the important func­tions of commission merchants and politically controlled tariffs. The former was the answer to the demand by the League that European imports and exports be shipped through the League city of Bruges. To avoid this control, business was transacted by sample through men who lived in Bruges and acted as agents. They merely negotiated the sale of the goods; details of ship­ment and payment were later arranged between the parties con­cerned, the agent receiving a percentage of the sale price as his fee. Much as the League sought to prohibit and later control such practices, they found no effective way of doing so. The city of Cologne broke away from the League on this issue, and the num­ber of commission agents rapidly increased and they have con­tinued to play an important part in the commerce and trade of the present.

Tariffs, of course, had been known during the Middle Ages.

The toll charges of the feudal lords who controlled strategic places along the highways and waterways were levies designed to bring the lord a revenue. It was, however, only when Queen Elizabeth permitted the manipulation of custom house levies in order to combat the privileges enjoyed by a group of European merchants from the days of the Hanseatic League that the tariff became an instrument of commercial warfare. Briefly stated, certain German merchants were able to bring goods in to Eng­land duty free; they owned a section of the city of London which was reserved for their business enterprises; a special court handled controversies between English and League traders. To prevent this unfavorable state of affairs, trading companies of distinctly English origin were encouraged by the sovereign, and tariffs were shifted to put the goods of the League merchants at a disadvantage. Thus was born the practice of nationalizing trade.

One might add indefinitely to the list of new economic tech­niques which grew out of the activities of the Hanseatic League. Commercial insurance, for example, was certainly stimulated by this trade. In addition to the scores of companies operating in Bruges in the days of the League, one company confined its busi­ness entirely to the writing of insurance on sea borne cargoes.

Another aspect of the economic conditions of the centuries im­mediately following Aquinas needs to be discussed before any further development of the ideas of money can be attempted. The increase of commerce and its demand for money found the monetary situation in Europe chaotic. Kings, nobles, and cities issued coins differing in weight, stamp, and name. The lack of a common unit made the function of the money-changer impor­tant. Added to this, however, were two tendencies which caused increased difficulty. Since coin was so scarce, every independent state and barony established restrictions against the exportation of metal. Within the state the content of the monetary unit was frequently changed, either by the process of devaluation instigated by the rulers in their desire for more funds, or by citizens who habitually reduced the content of the coins which fell into their hands by scraping, cutting, or chipping.

Henry VIII of England, for example, was exceedingly hard pressed for money. On several occasions he lowered the gold content of the English monetary unit in order to increase his own revenues. Henry had also borrowed large sums of money abroad, principally from Dutch bankers. When he was on the point of repaying his indebtedness he found that English cur­rency had lost much of its value in foreign exchange and only-coins of poor value were circulating in England. Henry's finan­cial advisor at the time was Sir Thomas Gresham, a member of the famous Mercers' company. In order to offset the disadvantage in English money, he required English merchants who sold Eng­lish wool abroad to pay the King's debts with the money they received for their wool. The King reimbursed them in debased English coins when they arrived home. Experiences such as this made Gresham a staunch advocate of sound money, advising the restoration of the original gold content of English coins. He saw clearly that where two kinds of money were in circulation—one of full gold value and the other of only part of the stated gold value—that the people would hoard the good money and spend only the bad money. Although Sir Thomas Gresham did not originate this principle it became known as Gresham's law. It states briefly, that good money will drive bad money out of cir­culation and even out of the country.

Trade was well nigh impossible during this period. Although systematic economic thought was meagre then, many proposals were submitted to standardize the monetary unit and control its circulation. The question of money became serious when gold was discovered in America, for the enormous quantities which entered the European trade completely disrupted the existing standards of money and trade.