The Mother of Invention:

Financial Goods and Services in the Medieval Period

1000 – 1500 CE

Michael Scott

Scott 2

INTRODUCTION

The collapse of the Roman Empire in the fifth century brought an end to the established

financial institutions. Europe descended into a period of relative chaos,1 characterized by a

scarcity of written records. The period, known as the Dark Ages, were likely not as grim as

previously believed. In fact, Western Europe in this period was home to fairly rich material

cultures which appear to have maintained extensive trade networks.2 However, this period left

few financial institutions on which the modern world could be built.

In contrast, the high and late medieval period was characterized by several significant

developments which have had a major impact on the modern world. The social context of the

medieval period3 played a crucial role in these developments. The Catholic Church was at the

height of its power during this period, challenged only by the Holy Roman Empire. The church

was able to exert considerable influence, therefore, on the economies of the various realms of

Western Europe. European society was primarily agrarian and organized around the feudal

system. Meanwhile, the merchants who inhabited the towns and cities were becoming wealthier

and more powerful, particularly in the city-states of Italy. In this environment, the marketplace

was dominated by reciprocity and redistribution,4 as the power of personal relationships, king

and church dictated many of the economic decisions taken.

In this context, the medieval economy developed, thereby building the foundation for the

modern world. The Catholic Church’s prohibition on the practice of usury gave impetus to the

1 Robert S. Lopez, “The Dawn of Medieval Banking,” in The Dawn of Modern Banking, ed. Fredi Chiappelli (New

Haven: Yale University Press, 1979), 3. 2 See Peter S. Wells, Barbarians to Angels: The Dark Ages Reconsidered, (New York: W.W. Norton & Company

Inc., 2008). 3 The phrase ‘medieval period’ will be primarily used in this essay to refer to the period from 1000-1500 CE. In

cases where the period from 500-1000 CE is addressed, the phrases ‘early medieval period,’ or ‘dark ages’ will be

used. 4 For a discussion of redistribution and reciprocity see Karl Polanyi, The Great Transformation.

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development of a number of financial services to ensure the necessary supply of credit.

Furthermore, this ban had a major impact on European society and in particular the treatment of

the Jewish minority. The kings of Europe were able to finance their wars through public debt and

either outright default or the debasement of the currency. In addition, the challenges of a

precious metal coinage resulted in the development of a system of deposit and transfer banking

which formed the basis for the modern banking system. Also, the perils of trade in this period

resulted in the development of new risk sharing contracts and an early insurance system. Finally,

the spread of knowledge from the Muslim world allowed for significant development in

European mathematics and finance. In sum, the medieval period was characterized by a number

of financial innovations and institutions which lay the foundation for the development of modern

financial system.

USURY

During the medieval period, a great deal of financial innovation and development was the

result of limitations on the practice of usury. This issue also had enormous implications on

interfaith relations as the different religions of Western Europe maintained divergent positions

with regards to the charging of interest. The key prohibition of usury, the lending of money with

interest, came from the Book of Deuteronomy which stated, “Non fœnerabis fratri tuo ad usuram

pecuniam, nec fruges, nec quamlibet aliam rem: sed alieno. Fratri autem tuo absque usura id

quo indiget, commodabis: ut benedicat tibi Dominus Deus tuus in omni opere tuo in terra, ad

quam ingredieris possidendam.”5 Roughly translated, this passage prohibits the practice of usury

5 St. Jerome, Deuteronomium (Deuteronomy) 23:19-20, Vulgate Bible. The Vulgate was a translation of the Bible

into Latin by St. Jerome commissioned by Pope Damasus I and completed in the period 390-410 CE. It was the

predominant translation in the catholic world during the medieval period and given official status in the Catholic

Church at the Council of Trent. (see Gloria Sigman, “The Word of God in Pictures,” History Today, (July 1999), 18-

25. & Michael Walsh, ed., “St Jerome,” Butler’s Lives of the Saints: Concise Edition Revised and Updated,

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in the lending of money or goods to one’s brother but not to a stranger. This distinction was the

basis for the different approaches taken to the issue of usury by the Jewish and Catholic faiths.

JEWISH CREDIT AND EXPLOITATION

For the Jewish people, the prohibition was taken to be limited to their co-religionists. A

clear distinction in this time period was drawn in Jewish ethics between the brother (ah) and the

foreigner (nokri). The nokri was excluded from the protection against usury which was afforded

to members of the mishpaha (clan).6 Thus, Jewish entrepreneurs were able to charge interest for

the loans they made to individuals who were not members of the Jewish community.

Not only was the Jewish population able to engage in money-lending with the Christian

majority without any ethical constraints, several aspects of their position in European society

made such a venture more attractive. Jews faced widespread discrimination in Western European

society during the medieval period. This discrimination was manifested in a variety of different

ways, including limitations on property rights and economic activity. Jews were commonly

prohibited from practicing certain occupations and restricted in the types of property they could

own or rent.7 For example, under English common law, a Jewish individual was only allowed to

(Westminster: Burns and Oates, 1991), 307-310. & Stephen Bertman, “The Anti-Semitic Origin of Michelangelo’s

Horned Moses,” Shofar: An Interdisciplinary Journal of Jewish Studies, volume 27, number 4, (summer 2009), 95-

106.). All Biblical quotations used in this essay will be from the Vulgate as this was the primary version in use by

the Catholics of the medieval period. An English interpretation will also be included. A translation of the passage is:

“Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon

usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury, that the

Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.”

Translation from Benjamin Nelson, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood Second

Edition, (Chicago: University of Chicago Press, 1969), xx-xxi. Prohibitions against usury are also contained in

Exodus and Leviticus. 6 Nelson, xix-xx. 7 Reva Berman Brown & Sean McCartney, “The Internal Exile of Medieval English Jewry,” The Medieval History

Journal, volume 6, issue 1 (2003), 57. Daniel M. Friedenberg, “The Jew as Chattel in Medieval Europe,” Judaism,

volume 53, (Winter 2004), 21-26.

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hold rented land.8 Such restrictions constrained the actions of the Jewish population. Essentially

excluded from participation in the agricultural sector which dominated medieval society, a

segment of the Jewish community sustained themselves by offering credit to the Christian

population.

In fact, because of their usefulness as financiers, the Jewish population was exploited by

many Western European regimes. The Jewish communities of several kingdoms were the legal

property of the respective monarchs. In Aragon, the fueros (charter) of Teruel made the Jews

servi regis, and incorporated them into the royal fisc. Thus the king had the right to levy special

taxes on his Jewish population. The fueros of Cuenca accomplished the same end in Castille.9 In

England, William I10 encouraged the relocation of Jews from Rouen in the Duchy of Normandy

to England to spur economic development in his new kingdom.11 The Exchequer of the Jews was

eventually established to administer the Jewish community. It administered a system of

chirograph chests which recorded loans made by Jewish money-lenders.12 In 1233, a statute

expelled all Jews who were not benefiting the English crown from the realm.13 Furthermore, the

Exchequer of the Jews had begun to control where England’s Jewish population could live by the

mid-1260s. The 1275 Statute of Jewry (Statutum de judeismo) further demonstrated the sole

reason for the interest of England’s monarch in his Jewish community was money-lending. It

8 Brown & McCartney, 57. 9 Maya Soifer, “Beyond convivencia: critical reflections on the historiography of interfaith relations in Christian

Spain,” Journal of Medieval Iberian Studies, volume 1, issue 1, (2009), 25-26. 10 Given the epithet ‘The Conqueror,’ William, Duke of Normandy, invaded England in 1066 following the death of

Edward the Confessor, and defeated Harold II at the Battle of Hastings. This is known as the Norman Conquest. 11 Richard Huscroft, Expulsion: England’s Jewish Solution, (Stroud, Gloucestershire: Tempus Publishing Limited,

2006), 25. 12 Paul Brand, “The Jewish Community of England in the Records of English Royal Government,” in The Jews in

Medieval Britain: Historical, Literary and Archaeological Perspectives, ed. Patricia Skinner, (Woodbridge, Suffolk:

The Boydell Press, 2003), 73-74. 13 Brown & McCartney, 56.

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forbade Jewish habitation in any town without a chirograph chest.14 The 1275 Statute also

recorded a chevage (head tax) on the Jewish residents of England. Furthermore, the English king

claimed entitlement to a portion of the estate upon the death of a Jewish individual.15 Similarly

exploitive measures were in place elsewhere in Western Europe including in France and

Germany.16

The relationship in medieval society between the Jewish community, particularly Jewish

money-lenders, and the Christian majority was complex. Throughout the period of Jewish

residency in England, the community enjoyed and was, at times, reliant upon the protection of

the English monarchy. This gave the monarch the ability to intercede to enforce or relax loans

made by Jewish money-lenders. For example, Henry I compelled Ranulf, Earl of Chester, to pay

his debts to a group of Jewish creditors. In this way the Jewish population was used as a source

of English royal patronage.17 The 1253 Statute of Jewry, enacted during the reign of Henry III,

made explicit this relationship between the English Jewish community and the monarchy:

All Jews, wheresoever they may be in the realm, are of right under the tutelage

and protection of the King; nor is it lawful for any of them to subject himself to

any wealthy person without the King’s licence. Jews and all their effects are the

King’s property, and if any one withhold their money from them, let the king

recover it as his own.18

Thus, the English monarch asserted his claim to the property of the Jewish community of

England. Thus, while the Jewish community was not forced to live in a ghetto, their dealings

were tightly controlled to promote the interests of the crown. Interfaith relations were also quite

complicated in other Western European kingdoms.

14 Brand, 73-74. 15 Ibid. 16 Soifer, 26. 17 Huscroft, 26-27. 18 Brown & McCartney, 56-57.

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Another example of the complexity of these relations in medieval Europe was the trial of

Bondavid Draguignan in fourteenth century Marseilles. In 1317, Draguignan, a Jewish money-

lender, was accused of being a false creditor by a Christian debtor. During the trial, twenty-four

Christians, including members of the nobility, testified to the good character of Draguignan.19

This case demonstrates the potential for extremely positive relations between debtors and

creditors in the medieval world. In fact, Jewish creditors even gave special terms to loyal

customers who were known as ma’arufiya.20 This special relationship between a Jewish lender

and some of his debtors highlighted the reciprocal nature of the medieval credit system. In 1318,

however, church pressure caused a more stringent definition of usury to be enacted in

Marseilles.21 Furthermore, by the late medieval period, interfaith relations in much of Western

Europe had continued to deteriorate.

Discrimination against the Jewish minority was present throughout medieval society. In

the period from 1007-1012, several governments tried to forcibly convert their Jewish

populations and there were massacres of Jews throughout Europe.22 With the passing of the

millennial anniversaries of the birth and death of Jesus Christ, interfaith relations improved.

However, anti-Semitism remained a significant force in medieval society. For example, the

“blood libel” emerged in Norwich in 1144.23 By the late thirteenth century, attitudes on the

continent had hardened towards the Jewish minority. In 1278, Pope Nicholas III issued the papal

bull, Vineam sorec, which sought to encourage missionary work to convert the Jews. In response,

19 Judith R. Baskin, a review of Shylock Reconsidered: Jews, Moneylending and Medieval Society, by Joseph

Shatzmiller, Association for Jewish Studies Review, volume 16, (1991), 231-233. 20 Ibid. 21 Ibid. 22 Huscroft, 21-22. 23 Brown & McCartney, 59-60.

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in 1280, Edward I of England ordered the Jewish population to attend Dominican sermons.24 By

this time, the English Jewish community had declined considerably in both population and

wealth.25 In 1290, Edward I expelled the Jews from England. This policy improved the king’s

finances, as, in response to the expulsion, both parliament and the clergy granted Edward I an

additional tax.26 Phillip the Fair expelled France’s Jewish population in 1306.27 Most of the other

regimes28 in Western Europe followed suit and expelled their own Jewish populations in the late

medieval and early modern period.

Another mark of the prejudice against the European Jewish population was the popular

conceptions about its economic activities. The image of the Jewish money-lender, exemplified

by Shylock, as “an avaricious and merciless creditor,”29 was firmly entrenched in the European

mind.30 In fact, the role of the Jewish community in money-lending had often been overstated,

both in the medieval period and by those studying it. In fact, Jewish money-lenders provided a

minority of the loans made in this period.31 The exaggeration of the significance of Jewish

creditors was used to obscure the importance of Christian financiers. As shall be shown, the

medieval church did not support the practice of realizing gains from loans.

24 Huscroft, 138. Alexandra Guerson, “Seeking Remission: Jewish Conversion in the Crown of Aragon, c. 1378-

1391,” Jewish History, volume 24, issue 1 (March 2010), 51. 25 Huscroft 138-140. 26 Ibid, 151-152. 27 Karen Barkey & Ira Katznelson, “States, regimes and decisions: why Jews were expelled from Medieval England

and France,” Theory and Society, volume 40 (2011), 475-476. 28 See for example the description in Niall Ferguson, The Ascent of Money: A Financial History of the World, (New

York: Penguin Group, 2008), 37-38. 29 Baskin, 232. 30 Ibid. 31 Gregory B. Milton, “Christian and Jewish Lenders: Religious Identity and the Extension of Credit,” Viator

(Berkeley), volume 37, issue 1 (2006), 308. Baskin, 231-233.

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CHRISTIAN CREDIT AND FINANCIAL INNOVATION

The universalism of medieval Christian ethics extended the prohibition against usury

outlined in Deuteronomy. The conception of a universal Christian brotherhood meant that usury

was forbidden by the church in all cases.32 This ban on usury was strengthened by the New

Testament where, in the Gospel according to Luke, Christians were instructed that:

Et si mutuum dederitis his a quibus speratis recipere, quæ gratia est vobis? nam

et peccatores peccatoribus fœnerantur, ut recipiant æqualia. Verumtamen diligite

inimicos vestros : benefacite, et mutuum date, nihil inde sperantes : et erit merces

vestra multa, et eritis filii Altissimi, quia ipse benignus est super ingratos et

malos.33

This passage exhorted followers to “love your enemies, do good and lend, hoping for nothing,”

thus implying that usury was unacceptable. The Third Lateran Council of 1179 codified this

principle by excommunicating usurers. The Council of Vienna of 1311-12 went further still,

condemning as heretical the mere argument that usury was not a sin.34 However, most of the

attention the medieval Catholic Church devoted to usury concerned the charging of excessive

interest.35 Canon law in this period, however, was quite clear on its ban on charging of interest.

In spite of the Christian church prohibition, credit was essential to the functioning of the

medieval European economy, thus Jewish money-lenders served an important purpose and many

Christians entered into the lending business. In fact, it was Christians and not Jews that

predominated in the credit industry.36 For example, in almost 70% of the transactions in a sample

32 Nelson, xxi-xxii. 33 Evangelium secundum Lucam (Gospel according to Luke), 6:34-35, Vulgate Bible. A full translation is: “And if

you lend to them of whom ye hope to receive, what thank have ye? For even sinners lend to sinners, to receive as

much. But love your enemies: do good, and lend, hoping for nothing: and your reward will be great, and you will be

sons of the Highest, for he is kind unto the unthankful and the evil.” 34 Ferguson, 36. 35 Milton, 309-310. 36 Milton, 308. Baskin, 231-233.

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taken from the Spanish town of Santa Coloma, the creditors were Christian.37 Some form of

compensation was necessary for, as Shylock reminded Bassanio in Shakespeare’s The Merchant

of Venice, “But ships are but boards, sailors but men: there be land-rats and water-rats, water-

thieves and land-thieves, I mean pirates, and then there is the peril of waters, winds and rocks.”38

That is to say there were risks involved in all of these transactions and the lender required an

incentive to hazard his money. Thus, despite the hostile position of the church towards usury,

many Christians did engage in the credit industry and required some return on their investments.

However, religious attitudes did have several significant impacts on how these individuals were

compensated.

Not all credit came in the form of direct loans; many Christians engaged in more socially

acceptable lending practices. Credit was used by Christian merchants to facilitate sales. The

profit derived from this lending behaviour was hidden by tying it to the transfer of the good.39

Some wealthy Christians even used Jewish lenders to disguise their activities. They acted as

silent partners to fund direct loans made by their Jewish colleagues. For example, in the town of

Santa Coloma, the nobles, Galcerandus de Tous and Bernat Zanou, provided the bulk of the

money used by a partnership of seven Jewish lenders.40 In these ways, Christians benefited from

extending credit to their co-religionists, yet the prohibition against usury was avoided.

An additional method to avoid the open usury, which had been condemned at the Council

of Tours in 1163,41 was the way in which the loan was denominated. In Spain, for example, some

loans, made predominantly by Christians, were denominated in units of wheat. The creditor

37 Milton, 308-309. 38 William Shakespeare, The Merchant of Venice, Act I, Scene III. 39 Milton, 306-314. 40 Ibid, 315-316. 41 Huscroft, 44.

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could thus realize a return through increases in the price of wheat.42 Wheat was not the only asset

which was used to hide the return on loans.

Another example of hidden compensation for loans appeared in the medieval wool

industry. Wool production was essential to the English economy as it was the dominant export

good in the late medieval period. English monasteries would sell the wool produced in the future,

similar to a modern contract. Merchants would buy this wool up to 20 years before its

production. Italian merchants dominated the industry; for example, the two most significant

trading groups, the Riccardi of Lucca and the Frescobaldi of Florence, alone purchased over 50%

of the contracted wool. The monasteries, which typically had considerable assets, frequently had

difficulty with cash flow and consequently often accumulated large debts. The large cash

injections provided by these contracts were thus beneficial to the monasteries. On the other side

of the agreement, the merchants paid rates which were considerably lower than the prices of the

day. Although there was considerable variation in price, dependent upon, among other factors,

the record of the monastery in question, merchants could purchase wool at about a 20% discount

from the prices of the day. This discount served a similar function to the interest on a loan.43

Thus merchants received compensation for investing their capital, while at the same time

avoiding the church prohibition on usury.

While some medieval Christians did engage in lending despite the stigma associated with

it, the prohibition against usury also spurred financial innovation. Several mechanisms were

devised to compensate creditors without the need for interest to be paid. For example, in

England, land was used to obtain financing without the need for interest to be paid. Under this

42 Milton, 312-315. 43 Adrian R. Bell, Chris Brooks & Paul Dryburgh, “Interest rates and efficiency in medieval wool forward

contracts,” Journal of Banking and Finance, volume 31, (2007), 365-366.

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system, the borrower would transfer the title of the property to the creditor in exchange for a

payment. The title would revert to the borrower on a contractually-defined date, called the law

day, in return for repayment of the loan. If the money was not repaid, then the property would be

retained by the lender. While the creditor possessed the title, he collected the rents produced by

the land. These rents served as a substitute for interest.44 The rights of borrowers and lenders

were further refined by the English Chancery courts and this process slowly gave rise to the

modern mortgage.45 A similar phenomenon occurred in medieval Spain. In this case, Christians

would offer pledge-loans. The creditor would receive the profit from the land which was pledged

in the interim period until the date specified for loan repayment.46 In both of these cases, the

spiritual conflict was avoided by not deriving profit directly from the loan itself.

ROYAL DEBT

Christian and Jewish creditors both played an essential role in European economic

activity during the medieval period. The credit transactions were not, however, limited to the

private sector. Many European regimes became major debtors as they sought to finance

increasingly costly conflicts. While Rome had been the victim of economic and military collapse

following its over-taxation and repeated debasement of the coinage,47 European monarchs were

able to borrow funds from wealthy merchants in order to sustain their operations. In fact, the first

recorded public debt was in twelfth century Italy.48 The public debt quickly spread throughout

Western Europe. In Edwardian England, the monarchy developed relationships with a series of

44 Michael S. Knoll, “The Ancient Roots of Modern Financial Innovation: The Early History of Regulatory

Arbitrage,” Oregon Law Review, volume 87, (2008), 108. 45 Ibid, 108-111. 46 Milton, 312-314. 47 Lopez, 3. 48 John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability,” The

International History Review, volume 25, number 3 (September 2003), 505.

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Italian merchant societies which provided financial services to the English crown. From 1272 to

1294, Edward I was supplied with credit by the Ricciardi of Lucca. The Frescobaldi of Florence

became the primary creditors of the English monarch between 1299 and 1311. Finally, during the

reign of Edward III, the Bardi and Peruzzi of Florence provided credit to the king.49 This

relationship ended rather unhappily for the bankers as the Bardi, Peruzzi and Acciaiuoli were

bankrupted when Edward III of England and Robert of Naples defaulted on their loans.50 This

event cleared the way, however, for the rise to prominence of the Medici family which would

leave an indelible mark on Renaissance Europe.

COINAGE

The European economy of the medieval period was dependent upon precious metals for

much of its coinage. While some base metals and alloys were used for low value coins, the

majority of the value of European money was stored in silver and, beginning in the thirteenth

century, gold coins.51 This resulted in several important problems. First, the money supply of

medieval Europe was tied to the supply of precious metals. This meant that the supply of coins

was inextricably linked to the mining of these metals, the transfer of these metals with other

regions outside of Europe, the wear caused by the use of coins and the effects of hoarding.52

Throughout this period, Europe was a major exporter of precious metals to Asia which was

sustainable and beneficial so long as the production of these metals remained high.53

Unfortunately, in the fourteenth and fifteenth centuries, there were repeated shortages in silver

49 Adrian R. Bell, Chris Brooks & Tony Moore, “A Medieval Credit Crunch?” Historian volume 100, (Winter

2008), 6. 50 Ferguson, 42. 51 Edwin S. Hunt & James M. Murray, A History of Business in Medieval Europe, 1200-1550, (Cambridge:

Cambridge University Press, 1999), 63. 52 Peter Spufford, Money and its use in Medieval Europe, (Cambridge: Cambridge University Press, 1988), 339-340. 53 Hunt & Murray, 63-64.

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production.54 This had the effect of exerting deflationary pressure on the European economy.55

Ultimately, this reliance on precious metal production for coinage increased the instability of the

money supply in the kingdoms of Western Europe.

Furthermore, the incentive existed for monarchs, facing difficult financial circumstances

to debase the coinage. This meant reducing the precious metal content of the coins in question,

which reduced their value. Such debasements were accomplished by diluting the precious metal

content by mixing in cheaper metals, clipping or shaving coins, or by simply producing smaller

versions of the same denomination. This was an attractive option for many medieval

governments.56 For example, the silver content of the English pence was reduced by about 47%

over the period between 1260 and 1499. The reductions in silver content were greater still among

currencies produced in Austria, Italy, France and Belgium: an almost 70% reduction for the

kreuzer57 between 1371 and 1499, a 72% decline for the lira fiorentina58 between 1280 and

1499, a 74% reduction for the livre tournois59 between 1258 and 1499 and a decline of almost

84% for the hoet60 between 1349 and 1499.61 In the period following 1296, Philip the Fair of

France derived nearly 60% of his income through his debasement of the French currency.62

However, such debasements of the coinage resulted in severe social costs as such action was

essentially a default on government debt.63 In the case of Philip the Fair, there was an outcry

among the clergy and the nobles to return to the “good money” of Louis IX. This crisis was a

54 Spufford, 339-340. 55 Hunt & Murray, 63-64. 56 Carmen M. Reinhart & Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, (Princeton:

Princeton University Press, 2009), 174-175. 57 Kreuzer was a currency produced in Vienna, Austria. 58 Lira fiorentina was an Italian currency. 59 Livre tournois was the French currency. 60 Hoet was a currency in use in what is now Belgium. 61 Reinhart & Rogoff, 176. 62 Barkey & Katznelson, 495. 63 Reinhart & Rogoff, xxxii-xxxiii.

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significant impetus behind the decision to expel the Jews from France.64 In the fourteenth and

fifteenth centuries, the reduction in silver supply led to even more frequent and widespread

debasements of the coinages of Western Europe.65 Thus, while it was a common practice

throughout this period, the debasement of the currency resulted in considerable economic

problems.

Another difficulty which was encountered as a result of the reliance on metal coinage was

the cost incurred to transport it. The cost of transportation, tolls, and guards made the transfer of

money a very expensive endeavour. It has been estimated that the cost to transport bullion from

Naples to Rome ranged from eight to twelve percent of the value of the specie.66 These

exorbitant costs provided the impetus for developments in the financial sector.

MONEY-CHANGING AND DEPOSITS

Beyond the development of the credit industry, another key innovation, which helped

give rise to modern banking, was the evolution of money-changers in medieval Italian city-

states. Initially money-changers simply facilitated exchange by using their expertise to convert

between the many currencies in use.67 However, in order to be successful at this practice, the

money-changers needed to establish a reputation as honest brokers. For this reason, in Lucca, all

money-changers (campsores) and spice dealers (speciarii) took an oath to commit, “no theft, nor

trick, nor falsification.”68 The establishment of this reputation commenced the process wherein

money-changers began to accept deposits for safe-keeping. Eventually, the proliferation of these

64 Barkey & Katznelson, 495. 65 Hunt & Murray, 82. 66 Ibid, 64. 67 Ibid. 68 Thomas W. Blomquist, “The Dawn of Banking in an Italian Commune: Thirteenth Century Lucca,” in The Dawn

of Modern Banking, ed. Fredi Chiappelli, (New Haven: Yale University Press, 1979), 55.

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deposits meant that individuals could use them to settle payments. Thus, some of the difficulties

resulting from the use of a precious metal coinage were avoided.69

The replacement of the coinage with paper records culminated in the thirteenth century

with the bill of exchange (cambium per literas). This financial instrument served as tool for the

international transfer of currency and credit while avoiding the cost of transporting bullion. The

bill of exchange also avoided the church’s prohibition against usury. It allowed for the receipt of

an amount of one currency by one party on a certain date and the repayment of this debt on

another date in a different currency. The bill of exchange was primarily a tool for the merchant

class which allowed them an efficient mechanism for the transfer of money.70

One notable group that played a major role in this industry was the Medici family. The

Medici began as members of the Money-Changers’ Guild (Arte de Cambio). In 1385, Giovanni

di Bicci de’ Medici was made the manager of the Roman branch of a Florentine bank operated

by his relative. Eventually, Giovanni returned to Florence and, when he died, his son inherited a

bank with branches in Florence, Venice and Rome. The Medici Bank was in fact a diversified

organization, made up of a collection of partnerships. Branch managers were compensated with a

share of the profits as they were junior partners in the enterprise. This diversification was the key

to the profitability of the Medici Bank.71 The Medici family would later have a tremendous

impact on Renaissance Europe as two members of the family became popes and many others

became dukes and queens.

69 Hunt & Murray, 64-65. 70 Ibid, 65-66. 71 Ferguson, 42-48.

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RISK MANAGEMENT

The troubles that could befall ships and caravans provided the impulse for innovation in

the financial sector in order to reduce the risk to merchants. In The Merchant of Venice, Antonio

lamented when he believed his ships were lost at sea and was nearly forced to forfeit a pound of

flesh.72 In order to minimize the risk of financial ruin in the event of shipwreck or piracy,

medieval merchants began to enter into insurance contracts, known as ‘bottomry.’ The earliest

insurance contracts were essentially conditional loans73 that would be cancelled if disaster

struck.74 Thus the loan was only repayable if the cargo arrived safely and, in the case of

misfortune, the merchant was only liable for avoidable damages. The interest rates for these

loans were based on custom and varied by Italian city-state. For example, the customary rate in

Pisa was 35 percent. However, canon law prohibited the sea loan in 1234.75 Another popular

mechanism for the sharing of risk in medieval Italy was the commenda organization which

unlike the sea loan was based on equity. These organizations typically existed for the duration of

the trading voyage and provided a way to share the risks of the expedition. The share of the

profit which was allocated for each partner in this organization was based on custom.76

The first true insurance contracts appeared in the 1350s. The premiums on these contracts

typically fell in the range of 15 to 20 percent of the value of the asset insured. By the fifteenth

century, the rate had fallen to below 10 percent.77 The archives of Francesco Datini, a merchant,

72 Shakespeare, Act III Scene II, Act IV Scene I. 73 These conditional loans were known as sea loans. 74 Ferguson, 186-187. 75 Maria Brouwer, “Managing Uncertainty through Profit Sharing Contracts from Medieval Italy to Silicon Valley,”

Journal of Management and Governance, volume 9, (2005), 239-240. 76 Ibid. 77 Ferguson, 186-187.

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provided an example of an early insurance contract from 1396 by which the insurer assumed all

risk which:

are of God, of the sea, of men of war, of fire, of jettison, of detainment by princes,

by cities, or by any other person, of reprisals, of arrest, of whatever loss, peril,

misfortune, impediment or sinister that might occur, with the exception of packing

and customs,78

until the safe arrival of the goods at the port of destination. Eventually standardized insurance

contracts would be incorporated into the lex mercatoria (mercantile law).79 However, maritime

trade was not the only sector to witness the invention of new mechanisms to share risk.

New types of businesses arose in the medieval period to help manage risk. Medieval Italy

was the birth place of the long-term business partnerships. Unlike earlier single-venture

businesses, these partnerships were established to operate for an amount of time decided by the

shareholders. The downside to this business model was that, in the case of bankruptcy, the

partners would be liable. Despite the risks, this model quickly proliferated throughout Italy to the

point that each town in thirteenth century Italy contained hundreds of these firms.80 The

medieval period also witnessed the creation of the first corporate charter. In the following

centuries, incorporation was used to facilitate a variety of public and semi-private ventures. It

was not until the modern period that the corporation became the omnipresent private enterprise.81

These new ways of doing business helped medieval entrepreneurs manage uncertainty and

formed the basis for modern risk management mechanisms.

78 Florence Edler de Roover, “Early Examples of Maritime Insurance,” Journal of Economic History, volume 5,

issue 2 (November 1945), 188-189. 79 Ferguson, 187. 80 Hunt & Murray, 62. 81 Morton Keller, “The Making of the Modern Corporation,” The Wilson Quaterly, volume 21, issue 4, (Autumn

1997), 58.

Scott 19

MATHEMATICS

Finally, one of the most important developments of the medieval period was the

introduction to Europe of Hindu-Arabic numerals. These numerals were far more efficient in

calculations than the Roman numeral system. This was recognized by the Italian mathematician,

Leonardo of Pisa,82 who undertook their introduction to Europe from North Africa with his book,

Liber Abaci (The Book of Calculation) which was published in 1202.83 The implications of this

revolutionary text on finance were clear in that Fibonacci explained concepts such as present

value, which was a future revenue stream discounted to its value today.84 The ultimate value of

the Liber Abaci rested, however, with the introduction of Hindu-Arabic numerals which would

serve to facilitate European trade, finance and accounting.

CONCLUSION

Many of the financial institutions of the modern world can trace their origins back to

Western Europe during the medieval period. A variety of social factors constrained the actions of

individuals in a society organized primarily along lines of redistribution and reciprocity. The

power of the Catholic Church was set against the practice of usury. This prohibition spurred

financial innovation as creditors and debtors developed new mechanisms for compensating

lenders. At the same time, the Jewish community was exploited as financiers and discriminated

against. Meanwhile, developments in public financing allowed the kings of Europe to fight their

costly wars. However, even with the novel application of the public debt and the levying of

special taxes on minorities, governments sometimes defaulted or debased the currency. The

82 Leonardo of Pisa is more commonly known as Fibonacci. 83 Ferguson, 33. 84 Ibid.

Scott 20

difficulties which arose as a result of the precious metal coinage also led to financial innovation

and the origins of modern banking. Western European merchants developed new ways to

manage risk and many of these innovations formed the basis for modern financial organizations

and instruments. Finally, the spread of ideas in mathematics from Asia aided the development of

modern finance. In combination, these factors laid the necessary groundwork for the creation of

the financial instruments and institutions of the modern world.

Scott 21

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