Book Six: The Emergence of Credit

Book Six. THE EMERGENCE OF CREDIT APECULIAR quality of our economic civilization is that it is founded upon an institution—the taking of interest— which was regarded with disapprobation and suspicion by the shrewdest thinkers of antiquity, among them Aristotle and Cicero. Its use was restricted to strangers by the Mosaic Code and was condemned outright for a thousand years by the Christian church. It was outlawed as well by civil law until the sixteenth century. The growth of credit, under which fair name have gone the institution of interesttaking and its dark shadow, debt, and the influence it has had upon the money mechanism, will be more fully developed in succeeding chapters. Here, only its beginnings, and its first reception as an instrument of commercial and financial power, will be dealt with. /. Death of a Philosophy Until the reign of Henry VIII in England interesttaking had been forbidden by both the canon and the civil law. The statutes of Alfred, of William the Conqueror, of Henry II, of Henry III, of Edward I, of Edward III, and of Henry VII had prohibited the lending of money upon any interest whatsoever, as an offense punishable by penalties ranging from forfeiture of chattels, lands, and Christian burial, under Alfred, to a loss of all substance, whipping, exposure in the pillory, and perpetual banishment, under William the Conqueror.

The law of England was representative of the European attitude in general on the subject of interest. The French laws against usury, which continued in effect long after their abrogation in England, were known as the most severe in Europe. Both French and English civil law derived from canon law, in which, 78 THE EMERGENCE OF CREDIT 79 for 1,500 years, prohibition of usury had been a central doctrine.1 These interdictions against the taking of interest, which it is the fashion of modern economics to regard as an especial mark of the ignorance and superstition of medievalism, were not capricious or unreasoned; rather they may be regarded as among the finest intellectual fruit of moral philosophy. Certainly it was no casual or incidental condemnation which the church visited upon the offense. Its heinousness was the subject of a vast literature, of disputations carried on ardently from generation to generation, and age to age. Aristotle, upon whose philosophy the thinking of the churchmen was largely based, was familiar with the effects of debt and interest in commercial Greece; the money economy of his day was highly developed, and the Solonian revolution was recent history. The church had risen from the ruins of a civilization that had crumbled under a mismanaged money, and the church fathers saw about them the terrible effects of commercialism gone mad. What has confused modern economic historians about the attitude of the church on money and interest is that the Schoolmen spoke in terms which are not familiar to modern economics, and this has given rise to the interpretation that they were legalists and logicians, rather than objective students. It is true that they condemned interesttaking because "it is contrary to Scripture; it is contrary to Aristotle; it is contrary to nature, for it is to live without labor; it is to sell time, which belongs to God, for the advantage of wicked men; it is to rob those who use the money lent, and to whom, since they make it profitable, the profits should belong; it is unjust in itself, for the benefit of the loan to the borrower cannot exceed the value of the principal sum lent; it is in defiance of sound juristic principles, for when a loan of money is made, the property in the thing lent passes to the borrower, and why should the creditor demand payment from a man who is merely using what is now his own?"2 But they also had a keen appreciation of the true nature of money economy, and the distinctions between money and wealth 80 MONEY AND MAN which confuse so many today. The distinction they grasped was expressed by Gratian: "Whosoever buys a thing, not that he may sell it whole and unchanged, but that it may be a material for fashioning something, he is no merchant (i.e., exempt from condemnation). But the man who buys it in order that he may gain by selling it again unchanged and as he bought it, that man is of the buyers and sellers who are cast forth from God's temple." By very definition a man "who buys in order that he may sell dearer," the trader is moved by an inhuman concentration on his own pecuniary interest, unsoftened by any tincture of public spirit or private charity. He turns what should be a means into an end, and his occupation "is justly condemned, since in itself, it serves the lust of gain."3 If the condemnations of the churchmen against interest are based upon narrow logic and legalistic concepts, the explanation is undoubtedly not that they failed to see the problem objectively, but that the rhetorical modes of the day were in a straitjacket, and they were compelled to find in legalistic concepts and express in narrow rationalizations the sanctions for the condemnation which arose out of a natural and instinctive repugnance to the evils they saw about them.

Gradually, beginning in the thirteenth century, after the fall of Constantinople and the rise of capitalism in Italy, a gradual relaxation began to develop in the attitude toward the subject of interest. In the literature of the time is revealed the process by which the prohibition was nibbled away. If a man might not charge money for a loan, he could, of course, take the profits of a partnership, provided the risks of the partnership were also assumed. A rent charge might be bought, for the fruits of the earth are produced by nature, not wrung from man. Compensation might be demanded if principal was not repaid at the time stipulated. Payment might be required corresponding to any loss sustained or gain foregone from being deprived of the use of the money. Annuities might be purchased, on the theory that the payment is contingent, and so speculative, not certain.

THE EMERGENCE OF CREDIT 8 1 These various practices and evasions began to find their defense in the sophistry of logic. The leading church fathers, themselves by now commercialists and politicians, developed a legalistic basis for the practices. The doctrine of damnum emergens that arose was based on the theory that if a lender suffered loss by the failure of a borrower to return a loan at the date named, compensation might be exacted. By the doctrine of lucrum cessans, if a man, in order to lend money, was obliged to diminish his income from productive enterprise, it was claimed that he might receive in return, in addition to his money, an amount exactly equal to this diminution in income. These two concepts of "actual loss incurred" and "certain gain lost" were the basis of the idea of interesse, or interest, which originally was a penalty exacted from the borrower for neglect to pay the debt at a certain time. After a time, it came to be the practice that loans were made nominally without interest, but the lender actually received, under the name interesse, a regular percentage for the whole period of the loan, the borrower by a fiction being assumed to be guilty of culpable neglect (mora) for the period.

"What remained to the end unlawful," says Tawney, "was that which appears in modern economic textbooks as 'pure interest' —interest as a fixed payment stipulated in advance for a loan of money or of wares without risk to the lender."4 The essence of usury was that it was certain, and that, whether the borrower gained or lost, the usurer took his pound of flesh. With the Reformation, the canonical doctrine came up for review. The general trend of the opinion of the reformers was that loan interest was a parasitic profit, admitting of no defense before any strict tribunal, but they consented to a practical compromise with the frailty of man, believing that interest was tolerable as a concession to his imperfection. This change of view was crystallized in England in the reign of Henry VIII by an act (37 Henry VIII, c. 9) which legalized the taking of interest on the ground, as the act declared, "the statutes prohibiting interest altogether had so little force that 82 MONEY AND MAN little or no punishment ensued to the offenders." A charge of 10 per cent per annum for the use of money was made legal and anything over this amount was forbidden as usury.5 Although the act was subsequently repealed, some years later in the time of Edward VI (but reenacted in 1571 by 13 Elizabeth, c. 8), and the legalization of interest did not appear in Europe until the following century, the year of the Act of Henry VIII, 1545, may be taken as a convenient date to mark the beginning of modern price economy.

Today debt is the very woof and warp of the fabric of modern commerce, to which the gaudy pattern of material achievement is merely tied like the strands of colored wool in an oriental carpet. Hardly a venture is undertaken, or a transaction consummated, from the building and furnishing of a shelter to the laying of a trans-Atlantic cable, the building of a steamship or the erection of a factory, without the powerful stimulus of credit. Without credit, or debt, our civilization could not be sustained— at least in its present complexity of organization and movement —and the mere repayment of debt, on a universal scale, is, in the opinion of leading economists, sufficient to disrupt the machinery of business and to produce the cataclysms and the convulsions we term depressions. Because our money system is today based more upon credit than metal, upon the institution of commercial banking rather than that of coinage, upon debt rather than wealth, it is necessary, in the pursuit of an analysis of the historical working of the money mechanism, to turn from the consideration of coinage and currency, which were the chief aspects of money in ancient and medieval times, to that of debt, its growth, and its present complexities.

//. The Perquisite of Sovereignty THE institution of debt and interesttaking is of course very ancient, and had become prevalent in Europe long before the THE EMERGENCE OF CREDIT 83 abrogation of the legal prohibitions against it. Tacitus mentions the limitation on interest in the third century B.C. In Byzantium, where the influence of the church was subordinate and subservient to the state, the ecclesiastical repugnance to interesttaking was inarticulate, but apparently the interest rates, and the terms on which debt might be contracted were closely supervised by the state authorities. The code of Justinian forbad illustres to ask more than 4 per cent, while traders were limited to 8 per cent, and others to 6 per cent, while bottomry ran up to 12 or 12.5 per cent.1 In Europe, however, due to the decay of society and the disappearance of money, together with the influence of church doctrine, money debt had been relegated to a minor role, and had become a nefarious practice of the Jews which honest folk regarded with horror. And when finally it did reappear as an institution of European society, the circumstances under which it was introduced were not such as to surround it with regard or veneration, or to permit its development in a restrained and orderly fashion. Debt, like money, which it serves as handmaiden, was accompanied in its growth in Europe by malpractices and mishandling to which it seems never to have been subjected in the older civilizations. Once the restraints of ecclesiastical dogma and intellectual discipline were thrown off, debt like money, became uncontrolled, unlicensed, and subject to no authority but that of the commercial passions.

A form of debt, of a salutary character, was growing in Italy, under Byzantine influence, in the form of bills of exchange and the practice of commenda, which involved the use of credit for short terms; but the growth of a body of permanent debt—the type that weighs like the burden of Atlas on modern society, a burden which is never extinguished, but seldom alleviated, and constitutes a cankerous drain on the social system—is to be traced to the financial practices of medieval princes and governments. We have already called attention to the sudden and overpowering greed for liquid wealth which swept over Europe with 84 MONEY AND MAN the renascence of money and the instruments of money economy. This passion for money, which manifested itself in an evergrowing ostentation, a luxury in food, and other sensual gratifications, had, it must not be forgotten, other farreaching and compelling motives. The gradual concentration of political power, and the increasing expenses of the state in administration, justice and diplomacy, were too diverse and heavy to be met by the feudal organization of economy, the system of financing the state by services and by taxes in kind. The general obligation of all citizens to bear arms, which was the basis upon which the feudal forces were built, proved incompatible with the increasing economic development, particularly the growth of city life; and for the hire of the ubiquitous mercenary troops by which the kings of Europe maintained their authority and extended their dominions, money was a prime necessity.

To the aid of statecraft and its demands for more and more money came the pseudo-philosophies of the age with their dictum, pecunia nervus belli—money is the sinews of war—and the exhortations to princes to lay up treasure. Diomede Caraffa, Ghillebert de Lannoy, Saba da Castiglione, Scipione Ammirato, and Lelio Zecchi all echoed the words of Giacomo Trivulzio's reply to the question of Francis I as to what was necessary for carrying on war in Italy: "Most Gracious King, three things must be ready—money, money, and once again money" (denaro, denaro, e denaro). Only Machiavelli, the much maligned, stood up against this pernicious doctrine, and combatted the general opinion, declaring that good soldiers may help to find gold, but that gold does not produce good soldiers. Machiavelli urged that the strongest resource of a well ordered state was the presence of a trained militia drawn from the citizenry.

The limited money income of the princes and the inflexible character of their fiscal systems were inadequate to provide for their increasing financial needs, and numerous expedients were resorted to. We have already discussed the widespread currency debasement which was practiced. The rough and ready expediTHE EMERGENCE OF CREDIT 85 ent of the sale of crown lands had even in the feudal state outrun the bounds of expediency. The practice of financing state needs by grants of land had, in addition, been a great war breeder. It forced the princes into still more extensive military expeditions for the purpose of acquiring more land for their disposal. State and administrative offices were sold as another recourse, until the administration was encumbered with a crowd of useless attaches who could not be got rid of, and the tradition it engendered—of office, once acquired, being a permanent possession of the incumbent—has remained to harass the governments of modern Europe and to nullify the most well-intentioned efforts of ministries to limit public expenditure.

Faced with the limitations of a fiscal system which no intelligence seemed capable of modifying to meet a changing age, together with a commonly held view that a prince was morally bound to supply the requirements of his administration from his own patrimony, the expedient of borrowing was adopted, and the doctrine was fostered that the prince had the right to compel his subjects to lend him money. During the latter centuries of the Middle Ages, and especially from the thirteenth on, princes more and more contracted the habit of obtaining forced loans from those among their subjects who relied on their protection or were in some other way dependent on them, and who also had liquid capital at their disposal. Forced loans were particularly in favor among princes of absolutist tendencies, such as Louis XI and his successors on the French throne, but such loans appeared in other countries of more liberal tendencies.

As late as Henry VIII, Elizabeth and James I, the forced loan was common in England, and not until 1628 did Parliament compel the English Crown to abandon it as a financial expedient. The first of the forced loans of which we hear was, however, not by a prince but by the Republic of Venice, in 1171. The restrictions placed by the Byzantine emperors in Constantinople upon the Venetian merchants there—who are said to have numbered some 200,000 in all, including retainers and families —induced the republic to prepare for war. A forced loan was 86 MONEY AND MAN decreed, and inspectors were appointed to collect sums in proportion to income. The state paid interest at 4 per cent every six months. The Chamber of Loans (camera degli imprestiti) was instituted to bank the money and pay the interest. The scrip delivered to creditors could be negotiated, and repayment was effected by periodical redemption.

Frederick II frequently resorted to loans as an extraordinary expedient, and we know that in the short period between September, 1239, and March, 1240, he borrowed to the extent of nearly 25,000 ounces of gold. Innocent IV obtained 200,000 silver marks by similar methods, and St. Louis contracted various loans for his crusades against the infidels. On certain occasions he sent into some town of the East, and to Acre more particularly, an authority to borrow in his name. The Grand Masters of the military orders of the Temple and the Hospital were commissioned to find money lenders, and it was at Paris that the repayment was effected on presentation of the letters of authorization, together with the receipts delivered by the Patriarch of Jerusalem and by the Grand Masters. This sort of financing could not be supported without the system of farming out the taxes and the pledging of individual branches of revenue. This led to a frightful degeneration of the financial system, which led in turn to the repeated heaping up of debts.

But the results of these methods of covering state expenditure were more destructive and pernicious than the breakdown of the system of public finance. The system resulted, if not in a "death a-borning," at least in the anemic and feeble growth of a real concept of credit and debt and its proper place in economic society; and this stunting of intellectual growth in the realm of one of the most important departments of modern economy arose from the casual attitude of the waxing governments toward their loan obligations. Instead of being regarded as the last resource of a harassed treasury, and to be treated, when incurred, with a sanctity and regard for their terms, loans were regarded as a prerogative of sovereignty, a legitimate method of raising THE EMERGENCE OF CREDIT 87 revenue, a form of "tax anticipations" which should be repaid if convenient but allowed to default, or be passed on to subsequent generations, if inconvenient to meet. The institution of debt, in a word, became, and still remains, in the traditions of the modern world, not a recourse of distress and extremity, but a facile means of obtaining present goods on an easy confidence in a roseate-hued future prosperity.

"The princes and their advisers seldom had sufficient economic foresight and insight to be deterred by higher considerations from the momentarily desirable state bankruptcy," says Ehrenberg. "Even in the second half of the eighteenth century the jurists were by no means agreed on this point whether a prince was bound to recognize the debts of his predecessor."2 Toward the middle of the fourteenth century French subjects tried to safeguard themselves from the exactions of forced loans and the inevitable defaults, and from 1350 to 1358 the charters of some of the towns contained a clause that the king was not to compel their inhabitants to make him loans. Edward III in 1339 defaulted on a loan of 1,355,000 gold florins obtained from the Italian firms of Peruzzi and Bardi, while at the same time the King of Sicily defaulted on a loan of close to 200,000 gold florins, and iniquitous measures had just then been taken in France against Italian bankers generally. In 1546 the Republic of Genoa reduced the rate of interest and deferred payment. The government of Philip II of Spain repudiated its debts on three occasions. On the first occasion, in 1566, the creditors of the state received only from 10 to 14 per cent of their due. The administration began by annulling every lien in respect to guarantee of loans on the revenues of the state, and offered to supply an annuity of 5 per cent per annum.

Twenty years later the government again repudiated its obligations and resorted to the most arbitrary measures, even issuing an attachment on the gold and silver coming from the Indies, gold and silver on the security of which banking houses had lent. In 1595, Philip II became a bankrupt for a third time. "It is characteristic that the funded debt of the Spanish Crown 88 MONEY AND MAN in the sixteenth and seventeenth centuries increased chiefly through the repeated state bankruptcies," comments Ehrenberg. Portugal showed herself as little trustworthy. In 1557 the King of Portugal effected a partial repudiation, accompanying his act by a pious appeal to conscientious scruples, and by citing the dogma of the theologians that he would be guilty of usury if he paid interest higher than 5 per cent. ///. Development of Credit Instruments A DISTINCTION is properly made by the commercial community between short term commercial debt and long term capital obligations, and between these two and public debt. While in essence they are all various forms of obligations to pay in money sums due in the future, and while they all so overlap that no definite boundaries can be drawn between them, yet each category has its own distinctive characteristics, and generally its own distinct market in the financial bourse. All three are children of money economy, and what is of more importance, they have all become vital components in the complex mass which today constitutes the money mechanism. To understand money as it functions in modern society it is necessary to go beyond gold and silver and copper, the coinage prerogative, seignorage, the gold-silver ratio, and reserve ratios—problems which have been the preoccupation of classic economists—and to examine the institution of debt in its historical setting, and its modern implications.

Commercial debt, especially shortterm commercial debt, made its appearance in Europe as a product of Italian capitalism and the commercial renascence which began in that area and spread thence throughout Europe, while capital debt grew out of a combination of shortterm commercial debt, and its instrumentalities, and instrumentalities which in turn were a result of the concussion of expanding Italian capitalism and medieval guild economy. Commercial debt made its appearance under more favorable auspices than public debt, which we have exTHE EMERGENCE OF CREDIT 89 amined. Perhaps this is because Italian commercialism grew up under the influence of the older Byzantine and Arabic-Hellenic tradition. In its earlier stages the processes, the instruments, and the institutions of commercial debt managed to acquire, before Italian commercialism had overshot itself in an orgy of profit making, enough character and stability to survive, in some of their original purity, the mishandling which they were later to receive.

The financial system that developed was an individualistic system, in contrast to the cooperative ideals of the medieval guilds, and, in the view of some, its narrow, individualistic and antisocial practices, expanding under the influence of laissezfaire philosophy and the mercantilist doctrines of the early modern era, explain the twentieth-century disenchantment with capitalism, the rise of dictators, with their dogmas of fascism, socialism, communism, and their variants, and the popular acceptance of a new bondage. The commercial heritage received from Italy, says Jacob Strieder, is primarily "a frame of mind," but it implies also "the whole sum of practical models in business furnished by the Italian merchants in the fields of exchange, wholesale trade, industry, colonial administration, and high finance."1 For the first three and a half centuries of the commercial renascence of Europe—say from 1252, which marks the reintroduction of gold coinage, to 1596, when the Bank of St.

George of Genoa collapsed—the Italians were the bankers of Europe. What brought them into prominence as bankers and financiers was the fact that, lying nearer to the Mediterranean and being in closer contact with Byzantium, they had become the principal traders of Europe, bringing down from the north amber from the Baltic, tin and v/ool from England and silver from Germany, and forwarding in exchange the spices, silk, soap, wax, refined sugar and glass of the East, and in addition, increasing amounts of their own manufactures.

90 MONEY AND MAN The Crusades had brought the Italian merchants directly into the Greek-Arabian world, which they had formerly known only through the Byzantine market and the mediation of the Byzantine traders. Merchants in oriental goods had begun to appear in Italy in increasing numbers from the eleventh century on. A revival of commerce in Flanders, Germany, France and England had widened the market, and the growing demand was naturally satisfied largely through the Italian cities. A large part of the industry of the Orient was being transplanted to Italy also. As money grew in importance not only as a medium of exchange but as an object of barter and trade, an insensible transition occurred in the character of the operations of the Italian merchants. Confining themselves at the outset to purely commercial transactions, it was not long before they were embarked upon financial undertakings. Much of their commerce had consisted of gold, silver and precious stones from the Orient. Presently exchange was added, and above all, lending at interest. A class of professional money changers grew up, recruited from such towns as Asti and Chieri, who, under the collective name of Lombards and Cahorsines, established their 'change counters in all the European trading cities of the Middle Ages. Their transactions soon brought them into competition with the pawnbroking business of the Jews, and in these usurious practices they, like the Jews, were not always free from odium and persecution.

It was not long before, in many places, corporations of cambisti were formed for exchange and deposit, and the great family merchant corporations, such as the Bardi and the Peruzzi, with their extensive system of branch houses throughout Europe, began to convert their trading establishment into huge private banking institutions. In the thirteenth and fourteenth centuries the Italian banker-merchants covered the civilized world with a network of communications. They had their correspondents; they received notices of political events, of combinations, and of chances.

THE EMERGENCE OF CREDIT 91 An important factor, in addition to the trading activities, which contributed to the growth of Italian merchant banking, was the papal financial system. The Roman Catholic church had in the course of the Middle Ages become an international organization with a gigantic administrative system. The Roman See had, partly involuntarily or partly on its own initiative, risen to problems of important political policy, of the waging of war, and the like. For such a development, a carefully built up system of papal taxation including all of Christendom had early become indispensable. It was founded chiefly under Innocent III, about the beginning of the thirteenth century, on the basis of tithes, Crusade contributions, taxes imposed by the papal bureaucracy, and perquisites of all kinds, levied on all Christendom, but particularly on the clergy. "The great Italian merchants," says Strieder, "with their trading counters in all the European centers, furnished ready and satisfactory instruments for the collection and transfer of all these dues. It was inevitable that these merchants should also supply loans to the Pope in times of financial stress. Even more often, they performed this function for the upper ranks of the clergy, who were not always in a position to pay the various levies demanded by Rome except by means of advances from the bankers. On the other hand, the financiers who were connected with the papacy sometimes accepted deposits from the treasury of the Papal See, when rich yields or an economical and able administration had given rise to a surplus."2 The commercial system of Italy reveals itself in the farreaching, systematically thought out trading practices, in the organization of trading companies, in the introduction of double entry bookkeeping, and particularly in the credit mechanism that was developed. The model for the banking and commercial practices of Europe, until the rise of modern banks of issue, is to be found in the practices of the money changers of Italy. In addition, the Italians developed several forms of corporate bodies; multiplied maritime contracts; placed insurances 92 MONEY AND MAN on practical bases—ceasing to employ them as stipulations accessory to other contracts; developed the bill of exchange; took fresh steps and surrounded commercial transactions with guarantees and penalties, including the revival of the principle of bankruptcy.

Most of these developments were borrowings from Byzantium or the Saracenic world, but they were modified under Italian influence, adapted to the more individualistic character of the Italian system, and in some respects were broadened and rendered more supple and universal in application. It was not until later, when the merchants had become almost wholly bankers, and were competing with the Jews in pawnbroking, and financing the requirements of princes and prelates, that the excesses and abuses began to creep in which remain as a canker to modern economy. Perhaps the most important instrument of money developed by the Italians is the bill of exchange. Although forms of the bill of exchange were known to the Assyrians of the ninth to seventh centuries B.C., and the publicani, the bankers of the Roman world, employed certain means of effecting the payments of money abroad, it is to the Florentine merchants or, according to some authorities, the Genoese merchants, of the twelfth century that its origin as a document of modern usage is to be traced. In that century we find the appearance of the bill of exchange under its various forms—the bill payable to order, and the promissory note; the ordinary bill drawn in the money of the country where it is payable, and the bill payable in another country at the rate current when due; the bill payable in a place specified, or where cargo was discharged; the bill to mature at date fixed, or after sight.

The bill of exchange was invented by the necessities of daily affairs, and by professional experience it was developed quite apart from any intervention of public authority, and around it grew up a customary law to meet all the exigencies of its use. The influence of the jurists over its growth was lacking, although before long exchange, with its complicated operations, raised THE EMERGENCE OF CREDIT 93 many delicate problems in which at every moment the question of usury came to the surface. It was in this connection that the jurists, and the theologians in particular, took up the subject, studied and discussed it. The legislator in turn busied himself with the bill of exchange. Nevertheless, as late as the middle of the sixteenth century the law did not concern itself with the bill of exchange other than to limit itself to approval of regulations made by the bankers themselves. According to Nys, the effect of legal regulation, which began in the sixteenth century, impaired some of the most useful features of the bill. "Thanks to custom," he says, "the bill of exchange was assuming, toward the end of the Middle Ages, a quasi-universal character; and when, in the sixteenth century, special legislation followed closely on special legislation, the result was the disappearance of one of the prime conditions of the bill of exchange—facility of circulation. A so-called anarchy was followed by excessive regulation injurious to trade, and to repair the mischief it was necessary to wait for the impulse of the nineteenth century towards legislative uniformity."3 The exchange contract in its primitive form, the contractus permutationis or cambii, was that by which a trader about to go on a journey borrowed in specie of the country he was leaving a sum repayable in the country of his destination. In the documents of oldest date the title contains an acknowledgment of the receipt of a sum, and of the obligation to restore it at an appointed term; but the characteristic nature of the transaction consisted in its extending from one place to another. In 1157 mention occurs at Genoa of a transaction resulting in a promise of payment in Tunis. We have also a bill of exchange of 1200, according to which a sum received on loan was to be repaid at Messina one month after the arrival of the borrowers' vessel in Marseilles or some other Provencal port.

The bill of exchange was in frequent use by the middle of the thirteenth century, but at this time its form was that of a document certified before a notary. At the end of the fourteenth century, however, it approached the form now in use. Bills of 94 MONEY AND MAN exchange were, however, drawn only by bankers and money changers who had branches or agents in the place stipulated for payment. The protest continued for a long while to be effected in the presence of a notary. In London the protest was often lodged after inquiry made on the doorstep of the shop of one of the many scriveners, or public clerks, a kind of solicitors, that dwelt in Lombard Street. The object of the questions put was to find out if anyone offered himself to take up the obligation and pay the bill. The importance of the bill of exchange in the money mechanism lies in the fact that it is the one form of debt upon which, experience has demonstrated, a system of payments may be built with safety in conjunction with a metallic money. Theoretically, it provides a basis for realizing the ideal of the managedmoney advocate, that is, a money related to the commercial transactions of mankind, rather than to a commodity the supply of which is stable but the demand for which is extremely fluctuating. The bill of exchange may be regarded only remotely as an instrument of debt; rather it is an instrument of exchange, and its use as an instrument of exchange is best illustrated in the modern use of the acceptance, which in commercial practice is an order drawn by a shipper of goods upon the purchaser for payment to a designated individual (or bank) of the amount of the purchase. In such a case, the only element of debt in the instrument is the fact that time elapses between the moment the instrument is drawn and the moment it is presented—no more than the interval required for the postal delivery of the bill.

When it is a time acceptance, the bill may run for a limited period, thirty, sixty, ninety days, or even up to one year or eighteen months, but in sound practice only so long as the orderly marketing of the goods requires. As debt, it is an extremely shortterm debt, the maturity being short enough to avoid the hazards of changes of value in the unit of money, the great danger in the body of longterm debt outstanding. Furthermore, in sound practice, its extinguishment is not based upon future productive ability, something v/hich experience has demonstrated to be extremely hazardous under the tempo and shift of modern economic forces, but upon goods actually above THE EMERGENCE OF CREDIT 95 ground and already in the course of marketing. There have been, of course, abuses in the use of the bill of exchange, particularly in bankers' bills, created largely to speculate in money, and in the use of bills of exchange to finance the carrying of excessive inventories, as was common during the decade 1920-1929, but these are abuses subject to intellectual control, while other forms of debt are not only subject to abuse, but also subject to economic forces which mankind has not yet learned to control.

IV. Growth and Modification of the Banking Function CONNECTED with the development of banking instruments is the growth of banking as an independent function, rather than as an appendage of mercantile establishments. Banks of deposit had been known in early Greece; and in Egypt, as adjuncts of the public granary system, under the Ptolemies, they had developed into a highly comprehensive system.1 They had appeared in Damascus in 1200, and in Barcelona in 1401, but it is to Venice that we owe those traditions and sound principles of commercial banking which we find more fully developed in the Bank of Amsterdam and the Bank of Hamburg. Venice was ultra-conservative, and the money changers and merchant bankers were subjected to much more rigid regulation than elsewhere. As early as 1361, an edict of the Venetian Senate forbad bankers to engage in mercantile pursuits, thus separating the banking business as an independent function.

Thirteen years later, to prevent bankers from engaging in trade through dummies, they were forbidden to create credits against certain commodities. Later restrictions required the bankers to open their books to inspection, to keep their current funds in view and make all payments over the counter (sopra il banco), and to put up a security with the state as guarantee of their liabilities. The reserve against deposits was repeatedly raised, as banks continued to become involved, and, in 1523, stood at 96 MONEY AND MAN 25,000 ducats. In 1524, the institution of bank examiners to supervise the operations of banks was created, and two years later the use of the check, by which one banker paid off his deposits by a draft on another banker, was forbidden.2 The various attempts to regulate private banking were unsuccessful. The laws enacted disclose the presence, in Venetian private banking, of precisely the same evils and mistakes as those with which later centuries have had to struggle. In 1584, the failure of the house of Pisani and Tiepolo for 500,000 ducats brought private banking to an end. The commercial importance of Venice was too great to be left to the winds of financial malpractice, and the Venetian Senate resolved upon radical banking legislation. A state bank was established, the Banco della Piazza del Rialto, which assumed the deposit business of the private bankers. The act was opposed by the banking interest, was repealed, but reenacted in modified form in 1587.

The Banco della Piazza del Rialto was founded upon the principle of safe deposit, a principle unfortunately largely submerged in modern banking practice. Lending of deposited funds was not practiced. The bank sought to make no profit from the use of its credit, and merely undertook to keep the money of depositors in safety, and to pay it out or transfer it to others at the will of the owner. The profits of the bank were derived from fees for effecting transactions on its books, for the negotiation and discounting of bills of exchange, for notarial services in connection with the protesting of drafts, and from the bank's services as money changer. As Venice was an important commercial entrepot, a great variety of currencies were constantly being received by the merchants. The bank accepted these various moneys, sorted, valued and discounted them, crediting the client on its books with the proper sum in Venetian money of account, or returning to him current Venetian money. Sums standing on the books of the bank to the credit of a customer were so much more certain in character and amount than the sum of a certain number of the worn and debased coinage in circulation that deposits came to bear an agio, or premium, over the actual money. Payments were made del giro, that is, by transfer on the books of the bank THE EMERGENCE OF CREDIT 97 from the account of one customer to the credit of another, or by actual cash paid to the depositor in settlement of the deposit liability. The more important method was of course the transfer on the bank's books.

The Banco della Piazza del Rialto dominated Venetian banking until 1619. In that year the Republic, pressed for funds, agreed to discharge a contract in bank credit, and for this purpose organized the Banco del Giro, famous in Venetian history. Though nominally based upon the same principles as the older institution, it was at the outset burdened with a deposit liability for which it held no corresponding specie. Bank credit as a monetary influence had, therefore, appeared, and when in 1637 the Banco della Piazza del Rialto was absorbed by the Banco del Giro, the concept of banking as strictly a deposit and warehouse function began to disappear. Public banks of deposit had been springing up—and falling —all over Europe in the fifteenth and sixteenth centuries, but it is not until the foundation of the Bank of Amsterdam in 1609 that we find a return to the rigorous principles of the Banco della Piazza—the idea that bank deposits are the property of the depositor and not to be used for the private profit of the bank, that the prime responsibility of a bank of deposit is that of safekeeping.

The deposit principle at Amsterdam arose, as in Venice, out of the confusing variety of coins in circulation and the dissatisfaction with the operations of the exchange brokers. In 1608, the city forbad the holding of deposits by the bankers, and the following year created the Exchange Bank (Amsterdamsche Wisselbank), later known as the Bank of Amsterdam, with a banking monopoly in the city. The Bank of Amsterdam was simply a warehouse for coin. The bank accepted deposits only at their bullion value and granted credit for the amount in lawful money, subject to a proper charge for handling. Payments in Amsterdam came to be made universally in bank money, which commanded a premium over actual coin, and a merchant was practically obliged to have an account there.

98 MONEY AND MAN The affairs of the bank were kept secret by the small committee of the city government which was charged with its administration; but to preserve the character of the institution the burgomasters and council of Amsterdam were required to take oath annually that the treasure was intact. It was generally supposed until the last half of the eighteenth century that the bank had sacredly fulfilled its obligations to keep in its vaults the exact amount of coin and bullion represented by the bank money outstanding. In 1672, when the French king was at Utrecht, the bank paid so readily as left no doubt of the fidelity with which it had observed its engagements, and the prestige of the institution rose enormously. Nevertheless, the bank had begun surreptitiously to use its power in various lending operations. As early as 1657 individuals had been permitted to overdraw their accounts, and later enormous loans were made to the East India Company. The truth became public property in the winter of 1789 and 1790.

The premium on bank money, which was usually kept above 4 per cent, fell to 2 per cent, and in August, 1790, disappeared altogether. In November, the bank was admitted to be insolvent and its debt was assumed by the government of the City of Amsterdam. It officially ceased to exist on December 19, 1819. Of only one bank, of all those founded in northern Europe, can we say with certainty that the true principle of deposit banking was maintained inviolate. That was the Bank of Hamburg. It was the last survivor of the medieval banks. For two and a half centuries it succeeded in carrying on the principles of the Bank of Venice and the Bank of Amsterdam. Accounts could be opened only by a Hamburg citizen or corporation and could be transferred only upon his appearance in person or by attorney with a transfer order. The principle upon which the bank was conducted was the granting of a credit on the books for the silver or gold deposited. No loans were made and no notes or other liabilities were created beyond the amount of coin and bullion on deposit. So faithfully was the rule adhered to that when Napoleon, on November 5, 1813, took possession of the THE EMERGENCE OF CREDIT 99 bank, he found 7,506,956 marks in silver held against liabilities of 7,489,343 marks. A large part of the treasure was removed, but when the freedom of the city was restored in 1814, the bank resumed business with unimpaired credit. The thefts of Napoleon's forces were made good in 1816 by a transfer of French securities. Thereafter, however, modern banking methods were gradually introduced and a capital of about 1,000,000 marks was accumulated in addition to the buildings.

The bank survived the storm of the crisis of 1857, which carried down so many of the banking institutions of Europe, but finally fell when the banking and monetary system of Germany was reorganized after the establishment of the German Empire in 1871. Incidental to the creation of the empire was the establishment of the gold standard, and the bank was ordered to liquidate its accounts in fine silver by February 15, 1873. The latest reference to the existence of the Bank of Hamburg is found in the proceedings of the Hamburg Senate on October 13, 1875, declaring their purpose to sell to the Bank of Germany for 900,000 marks the buildings of "the venerable institution which had performed such great services to German trade."3 With the disappearance of these older banking institutions, founded upon the honorable concept of the inviolability of funds left on deposit, a new type of banking began to grow up, based, in England, upon the unprincipled practices of the goldsmiths, and fostered by the deceptive theories and practices of John Law in France. It is from these later developments, rather than from the Italian beginnings, that modern note issue and central banking takes its origin. Central banking, however, did not really begin its growth until the nineteenth century, and we therefore reserve for later discussion its characteristics and its influences in money economy.

V. Beginnings of the Money Market THE transition from medieval Italian commercialism to modern 100 MONEY AND MAN price economy would not have been possible, but for one institution contributed by the guild system of northern Europe. The organized security exchange, upon which the liquidity of modern wealth depends, and which has become, in modern times— and in America particularly—a critical and significant adjunct of the money mechanism, was a development of the medieval trade fair. It was not until the sixteenth century that the commerce in money, money instruments, and negotiable instruments of debt and ownership, had become localized in a "stock exchange." Yet it is characteristic of the impetuosity with which Europe took to money economy, as well as the unprincipled character of money dealings, which we have noted in the case of coinage and public debt, and to a lesser extent in banking transactions, that hardly had security exchanges been organized when they were subjected to the same uncontrolled excesses which we have observed in other departments of the money mechanism. We shall have occasion to observe some of them as we trace the development of the security exchange.

Among the institutions developed by the guild system of medieval Europe was the fair. The fairs were periodic meetings of merchants and traders for the purpose of exchanging their wares, and were held wherever the roads of commerce crossed and wherever sufficient order and authority existed to provide security for the merchants. These periodic markets date very far back: five great fairs were held yearly in Arabia long before the time of Mohammed, and in Europe during medieval times they appeared at the chief halting places on the commercial routes from East to West, from Kiev to the British Isles. Often the fairs coincided with pilgrimages; indeed, the pilgrimages instituted by Islam were as commercial in nature as religious, and the pilgrimages to the shrines of the saints in Catholic Europe early became commercial in character. The reviving institution of law began to give special consideration to the fairs and the necessity of protecting merchants on their way to and from these assemblies. The "Truce of God," which was solemnly confirmed at the Council of Clermont in 1095, frequently renewed, and THE EMERGENCE OF CREDIT 101 ratified for the last time by the third Lateran council in 1179 as a general law for Christendom, forbad at any time the use of violence toward merchants, who were placed upon the same footing as priests, monks, lay brothers, and pilgrims.

It was natural that these fairs should become centers of financial transactions, particularly as the principal function of banking was connected with bills of exchange, that is, remittances to and from foreign parts. In these fairs, merchants in each commodity or branch of commerce had their own meeting place, and the meeting place of the merchants in bills were called "fairs of exchange." Here the bankers bought and sold their bills and fixed the rates of exchange for the various parts of Europe. At Piacenza, for instance, a resort frequented by the Milanese, Tuscans, Venetians, and Genoese, fifty or sixty representatives of the greatest firms gathered every three months. To gain admittance a security of 2,000 crowns had to be deposited, while, in order to be able to take part in the fixing of rates, it was necessary to have a counting house and to lodge a further security of twice that amount. The fair lasted eight days; the bankers dealt successively with the acceptance of bills of exchange, the fixing of the rate of interest, and compensation.

Attempts of governments to fix by legislative enactment a maximum for the rates of exchange were occasionally made, but the business was too quicksilver-like and eluded their pains. It was easy for the business, like Hamlet's ghost, to shift its ground; dealing with a commodity of universal demand, and practically weightless,* the merchants could easily take up their stand in places where the regulation was laxer. As such a result, we find, by the middle of the sixteenth century, the growth of the great Antwerp bourse, where financial transactions were practically unlimited, either by government or custom, or by the objects of the transactions themselves. * By the use of clearing-house mechanism and a form of money of account (the scudo di marche), it was unnecessary for the merchants to bring actual money to the fairs, and Rafaello di Turri writes that the bankers who settled accounts of hundreds of thousands of gold florins had scarcely enough money for a few days about them. 'The creditor,"

he adds, "dreads nothing so much as receiving money." Nys, op. cit., pp.213-214.

102 MO1HEY AND MAN Antwerp had risen to importance as a "fair" ci sixteenth century. Already an important center lad existed at Bruges—from whose fairs we get the name "bov rse"—but the silting up of the Zwin, hindering the loading anc ty early in the unloading of sea-going ships in Sluis, the port of Bruges, causea a migration of the merchants to Antwerp. The first great movement of foreign merchants from Bruges to Antwerp took place in 1442, but even in 1553, Bruges had not lost entirely its international importance. A more important factor in bringing the merchants to Antwerp was the license they enjoyed there. The trade in Bruges had been free in comparison with the restrictions prevalent in other cities of the Middle Ages, but in comparison with the absolute freedom enjoyed by the foreign merchants in Antwerp, Bruges seems medieval. For instance, in Bruges the brokers were a monopolistic corporation, but in Antwerp they were free. In Bruges, only sworn money changers could engage professionally in money changing or giro* bank business. In Antwerp, on the other hand, the Charter of 1306 granted this right to all burghers, and in the city's prime there were practically no restrictions on the trade in money, precious metals, and bills. The city authorities gave trade all the freedom possible, and such regulations as existed originated almost entirely with the merchants themselves.

Foreigners flocked to Antwerp to trade, and though there were fewer Italians and Hanseatics than at Bruges, great numbers of Portuguese, Spanish, English, and German merchants took their places and were now the leaders in business. In the course of four decades Antwerp became a trading center such as Europe has not witnessed before or since; for at no time in * Literally, "circular banking," the transfer of sums from one person to another upon the books of the bank. Giro accounts, in modern (European) banking represent non-interest bearing balances kept with the central banking institution for the settlement of indebtedness through transfer from one account to the other without the use of checks or currency, and corresponds somewhat to clearing-house transactions in American banking practice.

THE EMERGENCE OF CREDIT 103 European history has there been concentrated in one market to such a degree the trade of all the commercial nations of the world. It is said that more than five hundred vessels sailed in or out of the port in one day, and that the English merchants employed more than 20,000 persons in the city. The poet Daniel Rogiers said of the Antwerp exchange, "One heard there a confused murmur of all languages, one saw there a motley mixture of all possible costumes; in short the Antwerp bourse seemed to be a little world in which all parts of the great were united." The absence of trade restrictions in Antwerp effected a significant change in the character of the fairs. In the fifteenth century Antwerp had two fairs—the Whitsuntide fair in the spring, and the St. Bavon's fair in the autumn—which were used chiefly by the English merchants for their cloth trade; later there were four fairs; but with the migration of the Bruges trade to Antwerp, the seasonal character of the fair broke down, and business was transacted the year around. Since trade was free the year around, there arose the "continuous fair."

Another important alteration was the growth of trade by samples, which obviated the necessity of bringing vast quantities of actual wares to the city. Gradually, with the growth of standard types, we find appearing the true bourse, where dealings are consummated without displaying the wares themselves, but by the use of securities representing the wares. The use of the word "ware" suggests a produce exchange as the earliest and most important form of the exchange. Produce of various kinds, especially pepper, did form an object of exchange dealings in Antwerp; and there was a considerable development of the produce exchange later in Amsterdam; but the produce exchange, as a distinct type, did not reach its full development until the nineteenth century. The "ware" which formed the main object of trade on the Antwerp exchange was lendable capital, represented by various paper instruments. Princes who desired to borrow money, and who formerly would have applied to individual financiers like the Fuggers, turned to the exchange of Antwerp or of Lyons, 104 MONEY AND MAN where lendable capital from all over Europe was collected.

Through the medium of the exchange a French king could and did borrow money of a Turkish pasha; and it is said that payments amounting to a million crowns were made in a single morning without the use of a penny of cash.1 We see adumbrated, even eclipsed, at Antwerp, all the forms of financial manipulation with which the modern world has become so familiar that they are accepted as a matter of course. An interesting tract of the Licentiate Christoval de Villalon, printed in Valladolid in the year 1542, describes the speculation in exchange that had developed: "Of late in Flanders a horrible thing hath arisen, a kind of cruel tyranny which the merchants there have invented among themselves. They wager among themselves on the rate of exchange in the Spanish fairs at Antwerp. They call these wagers parturas according to the former manner of winning money at birth {parto) when a man wagers whether the child shall be a boy or a girl. In Castile this business is called apuestas, wagers. One wagers that the exchange rate shall be at 2 per cent premium or discount, another at 3 per cent, etc. They promise each other to pay the difference in accordance with the results. This sort of wager seems to me to be like marine insurance business. If they are loyally undertaken and discharged, there is naught to be said against them. But there are many ruinous tricks practiced therein. For dealing of this kind is only common in merchants who, holding much capital, perhaps draw a bill of 200,000 or 300,000 ducats in Flanders or Spain and conclude on one of those wagers, whereby one leaves the other free which of the two transactions he will carry out. By their great capital and their tricks they can arrange that in any case they have profit. This is a great sin."2 Arbitrage, or dealing in the differences between prices or rates of exchange in different places, was a modified form of this speculation. This had been done in the medieval Italian towns, but never on such a scale as at Antwerp. Maritime insurance had also been practiced in Italy, and later in Portugal. It grew so enormously in Antwerp that in 1564 six hundred people were THE EMERGENCE OF CREDIT 105 making what one writer calls a "fat living" out of it. There were no companies, but a number of people often insured the same vessel. Premiums became more or less standardized, but frauds were so common that an attempt was made in 1559 to regulate the business by law. Life insurance was also in use, limited chiefly to fixed periods (called term insurance today), such as the duration of a journey by land or sea. This also led to frauds, and even to crime.

A great deal of speculation went on in pepper, which was a barometer of trade, like steel operations today. The pepper trade was a prerogative of the king of Portugal, who sold the cargoes of the East Indian fleets to large syndicates which thereby obtained a monopoly at second hand. They often bought the cargoes while still at sea, gave the king of Portugal, who always needed money, large advances, and repaid themselves by charging a high price. They were able to regulate the price in their own interest at Antwerp, where the bulk was disposed of, or at any rate until the arrival of a new fleet from the East, which then set the price. These two factors, the interest of the syndicates and the amount of the new imports, determined the price of pepper, and as both were incalculable, as were a number of other factors, such as war and peace, the price of pepper was extremely speculative. All sorts of methods were used to divine the course of the pepper market, and we find astrological prognostications flourishing, and "market forecasters" and other equivalents of today's chart readers that swarm in the brokerage establishments of Wall Street. And we find merchants of the highest sagacity and good sense, such as Lienhard Tucher, giving close heed to these absurd prophecies and systems of prophecy.

Such an atmosphere was the breath of life to promoters and adventurers, as well as to captains of industry, finance, and commerce. Lotteries flourished. People could be found to bet on anything, including such matters as the sex of children yet to be born. Some transferable "securities" appeared to represent capital, and commodities were also sold by grades, without the use of samples. Negotiable stock did not precede bourses, however —the evolution was rather the converse.

106 MONEY AND MAN The speculative coloring which dealing in commodities assumed injured it in the eyes of many solid merchants, and the liquidity of capital and the growth of machinery of exchange, rather than stabilizing trade and strengthening the fabric of commerce, as is so lovingly claimed by the defenders of unregulated bourses, only served to destroy the substance while it exalted the illusion. We have evidence of this in an opinion rendered by fourteen Paris jurists in 1530 on the question as to whether certain forms of business then practiced at Antwerp were allowed by canon law. It is based on testimony given by Spanish merchants resident in Antwerp. The evidence adduced that many of the richest firms no longer liked to deal in commodities, unless all the merchants were unanimous in believing that there was good prospect for profit; and the reasons they gave not only are witness to the speculative character which trading had assumed, but they serve as a penetrating explanation of many of our modern commercial vicissitudes: (1) It was very troublesome to export or import commodities, to warehouse and resell them, a process needing investigation of the buyer's credit, while the number of sound firms dealing in commodities was declining.

(2) It was too risky, for they feared to lose their capital, or get it "frozen." (3) Finally, it did not offer so good nor so sure a profit as dealing in money and bills. Therefore they engaged increasingly in the latter.3 A few decades later Lodovico Guicciardini, a man of good economic sense, who in other respects was full of enthusiasm for the greatness of Antwerp's trade, confessed that the dealings in money at Antwerp were now a public danger. "Formerly the nobles, if they had ready money, were wont to invest it in real estate, which gave employment to many persons and provided the country with necessaries. The merchants employed capital of this kind in their regular trade whereby they adjusted want and superfluity between the various countries, gave employment to many and increased the revenue of princes and states. Nowadays, on the other hand, a part of the nobles and the merchants THE EMERGENCE OF CREDIT 107 (the former, secretly through the agency of others, and the latter openly in order to avoid the trouble and risk of a regular profession) employ all their available capital in dealing in money, the large and sure profits of which are a great bait. Hence the soil remains untilled, trade in commodities is neglected, there is often increase of prices, the poor are fleeced by the rich, and finally even the rich go bankrupt."4 "We know in the main this picture is a true one," says Ehrenberg. "The merchant class of the medieval centers mostly turned their energies to dealing in money. The people who were their successors, the Spaniards and the Portuguese, did not know how to profit by this change. They borrowed the capital necessary for world trade from the former and had to give back to them the lion's share of the profits. The trading nations of modern times, the English and the Dutch, had not yet laid hands on the heritage of the Mediterranean cities. Guicciardini's pessimistic view of his own times is easily understood."5 With the breakdown of the restrictions against interesttaking, which was pretty general by the middle of the sixteenth century, the loan business came prominently to the front, and at Antwerp, Lyons and to some extent in other cities, obligations of princes and cities and the great merchants became an object of trade and speculation. The great merchants, such as the Fuggers, whose credit was unquestioned, would borrow in one market and lend in another where the rate was more favorable.

Most of the losses from the speculative excesses of the day were the result of these merchants' overstraining their credit to engage in risky ventures, carrying down with them the community which had advanced them money on "deposit." This was the case with Hockstetter, who tried to corner the mercury market and ruined his "depositors" as well as himself. It was the case with the Bank of St. George and the Peruzzi of Genoa whose advances to Philip II of Spain involved most of Genoa, and practically ruined the position of that city as a financial center when Philip defaulted in 1595. This process was cloaked under the name of deposit business, and although it differs consider108 MONEY AND MAN ably from modern bank deposit business, it bears more resemblance to such business than currently prescribed banking theory would have us believe. VI. Appearance of the JointStock Company WHEN, toward the end of the seventeenth century, the true stock exchange made its appearance, as distinct from the older bourses in which commodities as well as financial instruments were dealt in, everything was prepared for the blossoming of all the speculative machinery and practices which have become so significant a part in the modern scheme of money economy. The restrictions against the taking of interest had broken down, and bonds of public and private borrowers had become a familiar object of trade. One further thing was required to prepare Europe for the wild speculative inflation that marked the opening of the eighteenth century—the jointstock company.

The jointstock company was an outgrowth of the "regulated company," which in turn was a development of the partnership and limited associations of the merchant guilds. Societies had existed in the first part of the Middle Ages with social and religious objects, and about the eleventh century, with the springing up of trade, commercial guilds arose. The Anglo-Saxon word "guild" means a "contribution to a common fund" and came to be applied to the society itself. The dangers and difficulties of trade led the merchants to unite in bands for a journey, after the fashion of caravans now found in the unsettled countries of the East. Some of the early guilds subjected the members to regulations like the following: Everyone was obliged to carry armor, a bow, and twelve arrows, on penalty of a fine; they must stand by and help one another when they set out for a journey; in case one member had not sold his wares the others must wait one day for him; if one was imprisoned or lost his wares on the road the others must ransom him.

The organization was probably temporary at first, and the company of merchants dissolved at the end of the trip; but as THE EMERGENCE OF CREDIT 109 such caravans became more regular at any place there grew the tendency to permanence of organization. These merchant guilds were at first also private associations, formed privately by the merchants to protect themselves; but they received public recognition and became part of the town government as the town saw the advantage it could get from them in pushing its trade and protecting it against the efforts of rivals. They included not only professional merchants, but all who bought and sold, including many artisans. Of the nine members who belonged to the Shrewsbury merchant guild in its earliest period two were fishermen and one was a butcher. <«§ §»» Along with the growth of the merchant guilds arose various forms of commercial associations, particularly the partnership.

The need of association was felt because it was necessary that a merchant or his representative accompany his wares on the road. It was often difficult for a merchant to look after a commercial venture in person; he could not trust it to a hireling; and the slight development of the carrying and commission profession made it impossible for him to leave it in charge of persons who nowadays make it their business to attend to such matters. The merchant therefore would associate with him someone who could represent his interests, generally a member of his family, and family partnerships were the prevailing form of association at first. A more developed form of the association was the commenda (from the Latin commendare, entrust). The common form of the commenda was an agency commission given to a commercial traveller allowing him to take abroad certain goods, at the owner's risk, and to dispose of them in his discretion. It was a sort of silent partnership in which the principal, or commendator, supplied capital in the form of money, wares, or a ship, while the agent, or tractator, contributed only his personal services to the enterprise. The profits were usually divided onefourth to the tractator, threefourths to the commendator.

The commenda was of Arabic origin. It existed in the time of Mohammed, and it became the mainspring of Moslem trade.

110 MONEY AND MAN It was common throughout a great deal of Asia and Africa long before the Christian merchant learned to use it and to profit by the facilities it offered. In Europe, it was first adopted in the south, on the Mediterranean coast, and spread from there northward. As the circle of its operation grew wider and commerce increased, it became one of the most general forms of association. In the fifteenth century it was all but universal. By the sixteenth century we come to the "regulated company." Among the reasons for the rise of the great commercial companies was the exposure of distant commerce to armed attack by pirates, privateers and formal enemies of the nationals, which consequently required a greater military force for its protection than a small group could afford. Partly because of these dangers, partly because of the natural perils of the sea under the conditions of navigation at the time, partly because of the very novelty of the commerce, distant trade was very hazardous. As a result, associations of merchants were organized for carrying on trade in these parts. These associations came to be required by European governments, which assigned a certain field to each company in which it was given a monopoly, and in that field trade by individuals and by other associations was prohibited.

The purpose of this was partly to give a certain character to the trade of the nationals in the foreign country, by eliminating unscrupulous traders and those who went out on single ventures and with no idea of building up a permanent trade, but also to diminish the risks of distant commerce by assuring to those who spent money in developing it the full fruits of their labor. An additional reason was the ease of taxation and regulation which the regulated companies offered. The regulated company was merely an association of merchants who secured admission by paying the entrance fee and giving obedience to the rules. Each merchant traded on his own capital and kept his profits for himself; there was no pooling of capital and profits. It was an organization similar to a modern stock exchange. Among the earliest of these companies was the English MusTHE EMERGENCE OF CREDIT 111 covy Company, organized in 1556 for trade in Russia. During the course of the next several decades they began to appear in increasing numbers, among them the Company of the Levant (15 81), the Company of Africa (15 8 8), the East India Company (1599), the Virginia Company (1606), and the Company of North America (1606). French companies appeared a little later, the first, apparently, being the Compagnie du Canada, organized in 1599. After that they began to multiply and by 1642 twenty-two had been formed. Louis XIV created nearly forty, largely by the process of merger and reorganization. So effectively had the world been parceled out and monopolized by these regulated companies that by 1600 in England, for instance, an independent merchant had the whole world, save France, Spain and Portugal, shut against him.

The passage from the regulated company to the jointstock company was a slow process of transformation in the character of the regulated company arising from the demands for associations with greater permanence and stronger authority over their members. Early examples of the jointstock company are to be found in Italy, but the company form developed north of the Alps only after the founding of the Dutch and English East India companies about 1600. The English East India Company, organized in 1599 as a regulated company, was made over into a jointstock company by degrees, and could not be regarded as permanently established on this basis for over fifty years. The Dutch East India Company was the first of the true jointstock enterprises. It began in 1602 as six semi-independent groups representing as many cities, with a loose and somewhat vague general administration to join them. Not until 1652 were its shares put on the market. They were taken up to a considerable extent by the capitalists of Antwerp who no longer had use for their money at home.

These early company enterprises were highly successful, and by 1700 England and Scotland together had 140 jointstock companies with a total capital of £4,250,000. Most of the com112 MONEY AND MAN panies were small, of course, and threefourths of this amount represented the capital of the Big Six—the East India, the African, Hudson's Bay and New River companies, and the Bank of England and the Million Bank. The first two voyages of the English East India Company netted 95 per cent, although it took over nine years to close the accounts.1 The Dutch East India Company was more consistently profitable. Its dividends were as follows: 1605, 15 per cent; 1606, 75 per cent; 1607, 40 per cent; 1608, 20 per cent; 1609, 25 per cent; 1610, 50 per cent; 1613, 37 per cent. In 1622 it paid a dividend of 22 per cent in cloves.2 With the organization of the Royal Exchange in London in 1698, the modern stock exchange makes its appearance. The Paris Bourse was organized in 1724 and by this time the bourse of Amsterdam had achieved the same general structure by evolution. These new exchanges, limited in their operations to dealings in shares and money instruments, together with the shares of the regulated and jointstock companies which were beginning to be traded in, offered new possibilities for speculation which soon attracted, and then absorbed, public attention.

The methods of manipulation which had been developed into an art on the older bourses were now adapted to these newer objects of attention, and it was quickly discovered that dealings in shares offered larger opportunities for gain, on a slenderer capital, than the older forms of arbitrage and exchange speculation. Traders speculated on a rise, or fall, or a combination of both. Systems of news gathering and forwarding by which traders could obtain advance information of important events affecting the price of securities, became highly developed. London speculators, for instance, got word through private channels of the signing of the Treaty of Ryswick in 1697 a day before the British ambassador arrived with the official announcement, and made fortunes in buying up Bank of England stock, the fate of which hung on the outcome. The sudden jump in the quotations from 84 to 97 was not explained until the following day.

Underhand methods of trade were common. Speculators THE EMERGENCE OF CREDIT 113 would set afloat rumors to depress the price of securities, and then buy in. One day during the reign of Anne in England a welldressed man rode furiously through the street proclaiming the death of the Queen. The news spread and funds fell; the Jewish interest on the exchange bought eagerly, and were suspected later of having been responsible for the hoax, though it was not proved against them. The Englishman, Child, who made a fortune in speculating, and who was called in a pamphlet of 1719 "the original of stock jobbing," would have one set of brokers spread rumors of disaster, and sell a little of his stock publicly, while another set bought for him "with privacy and caution," and in a few weeks he would reverse the process and come out 10 or 20 per cent ahead. These manipulations resulted in what were regarded at the time as enormous fluctuations in the quotations, although in comparison to modern stock market movements they would hardly be regarded as extreme. The shares of the East India Company, for instance, moved within a range of £200 to £37 in the five years 1692 to 1697, while the range of quotations on the African Company shares was from £52 to £13, and on the Hudson's Bay Company, from £260 to £80. A number of stock jobbers got prison sentences as a result of manipulations, but no visible effect was noted in the price movements that followed.

By the dawn of the eighteenth century, the materials were all prepared for the first credit inflation of the modern world. Because of the influence it had upon the use of money and the mechanism of money in modern times, it becomes necessary to examine the manifestations of this "bubble era" in some detail.