The idle ramblings of a Jack of some trades, Master of none

Nov 22, 2008

Hawala and Honour

Financial transactions based on honour have a long history. In the ages before the advent of automatic encryption and digital signatures, when carrying cash on one's person was an invitation to murder, how did people pay and receive monies for goods and services?

In the peerless treasure-trove of papyri unearthed at Oxyrhynchos in Egypt is one example of financial documentation. Like all legal documents, this one carried a seal from one party. Seals, though, could be forged. To get around this problem, a 'Sign' was used - a piece of information known only to the two parties to the transaction would be entered into the contract.

Please transfer at your place in the Oxyrhynchite to Aurelios Herakleides son of Kephalon the poulterer, who lives in the same street as our brother Leonides, nine hundred drachmas of silver in imperial coinage, against which I have received the equal amount in full of nine hundred drachmas here in the village of Sesphtha, but do not hold him back. By way of Sign, the fact that I loaded up for you three hundred linen pieces when you embarked with Alexandros the linen-worker. This note of credit is binding and in answer to the formal question I have agreed to it. 1

The transactors were Sinpsanesneus and his son Leonidas; the Sign, very likely, was to be used only once; there was probably little counterparty risk, the parties being relatives. Honour, then as now, was a powerful incentive to keep to the letter of the transaction. Reputational risk was all.

What if the counterparties were not relatives at all? How to ensure that payments would be honoured? It is no surprise that the greatest advances in finance have always occurred in regimes with strong protection by law. For example, Italian merchants in the middle ages had no qualms to extend credit to people in Bruges or Avignon or London, but would be very wary of doing similar business in Germany or Scandinavia. In the areas where the Roman church had its long reach, financial transactions were protected; the bankers, therefore, thrived.

Except, of course, when they lent money to kings. Sovereign default after an unsuccessful war was a frequent reason for the collapse of mercantile banks. Sundry rulers of England forcibly took monies from banks (and Jews) in their jurisdiction, and even signed contracts; they would eventually refuse to pay, and that was that for the banks.

One of the greatest of medieval bankers was Giovanni di Bicci, of the family Medici. When he sent his officials to setup branches of his bank across Europe, he gave them very strict instructions.

Don't lend more than 300 florins to cardinals; to courtiers no more than 200; don't give credit to any Roman merchant, unreliable; nor to feudal barons, not even if they give you security (barons are a law unto themselves); and never, never lend money to Germans, since their courts won't respect your claim if, or rather when, things go wrong. 2

In the early days of the Medici, professionals of integrity and honour were hired as branch directors; they obeyed Giovanni's edicts without question, and the banks prospered. But there was always a rotten apple in the pile. In 1402, Neri di Cipriano took over the Venice branch and broke contract by lending to Germans.

Even Poles! He never recovered it. Faking the books, both manifest and secret, he invented a first-year profit and borrowed at 8 percent to have further capital, which he went on losing. Since the Medici did not routinely send inspectors to their various branches, it was three years before the now-considerable reversal of nearly 14,000 florins was discovered. 3

Neri was condemned by the Venice courts and he fled to Cracow, where he got back some of the owed money from the Poles. He never paid back the Medici.


  1. Tim Parks, Medici Money, Profile Books, 2005. Page 49.
  2. ibid, Page 50-51.


Guru said...

Am enjoying this delve into history. Hawala in India has had a thriving history and geography. Same principles and pitfals apply ..Dalrymple records how the last mughal aand his progney borrowed crazy from the banias ..never to give it back.

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