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

Feb 25, 2011

Medieval Credit

In Hawala and Honour, I discussed various ways that medieval businessmen and private individuals and even the state (or royalty) obtained finance, and how they enforced contracts. In an about-turn to today's perceived view that the Protestant ethic is more conducive to financial innovation, in the medieval period, it was the Roman Church that enforced contracts in its jurisdictions. Bankers such as the Medici had a horror of lending money to the Germans because Catholic law didn't apply in German courts, and they often couldn't recover money from German debtors.

While the principles of money as a store of value and medium of transaction had long been established, coin or bullion was not always easily portable. Much of historical trade was on the basis of silver or gold in exchange for goods, of course, although this was never really secure. Long-distance trade didn't explode, therefore, until the development of the bill of exchange in the thirteenth century.

Here's how it worked [1]. An English exporter would send his goods to his Florentine counterparty. The importer would receive the goods and pay the agreed amount of florins to his bank, who would furnish him with a bill of exchange. He would then send the bill of exchange to his payee in England, while - in parallel, the bank would send a notification to its agent in London. When the exporter received the bill, he would approach the agent, hand over the bill and obtain his monies in sterling.

The exchange rates would, I surmise, have been as agreed between the exporter and importer. The importer would know how much his bank would charge to convert florins to sterling at some future delivery date; this rate would determine the amount of florins he would hand over to the bank upon receipt of the English goods. There were problems that could arise from the transit time between the shipment's departure and arrival, and the departure of the notification to the banker's agent, and his receipt of the bill of exchange from the English exporter. The determination of future rates was upon the assessment of the banker on the risks of the journey and the distance to be covered; the future payment date was often standardised, at usance: between Florence and London, this was set at 3 months.

This schematic is after Spufford [2].

International Trade and Credit Flow
The system of double-entry book-keeping that was invented at about the same time helped keep track of the various credits and debits in all these transactions. The exporter would write in his book's debit column an entry for goods sold. The importer would enter a credit to the payee upon receipt of the goods, and a debit to the banker for the delivered florins, thereby immediately balancing his book. The banker would enter a credit of florins from the importer. When the English exporter produced the bill of exchange at the banker's agent's, the agent would enter a debit for the bill to the banker, and the exporter himself would enter a credit for the payment received. The exporter's books would be balanced at that point. The bank and the agent would settle their books at their own convenience.

What did a typical bill of exchange look like? A treasure-trove of such information was revealed when, in 2000, the Borromeo-Arese family allowed academics from Queen Mary College to study two full ledgers from the medieval Borromei Bank of Bruges and London (estabished in 1434). Here is a description from the Queen Mary website [3]:
The acceptance or payment of a bill was usually set out in a complex sentence that indicated who had delivered the bill, who had taken it up, who had agreed to pay it and who was to be paid.[2] In the following example the Bardi of Bruges were takers of a bill of exchange for 800 scudi or flemish écus at an exchange rate of 7s 5d of the £ Barcelona per écu. The Deliverer sent the bill to the Payee in Barcelona; the Taker would write to the Payor in Barcelona with instructions to pay it to Payee at usance, that is 65 days from the writing of the letter. The Italian entry reads:

Ubertino de’ Bardi e compagni deon havere … sono per una lettera ne fecie a Barzalona di scudi 800 a s7 d5 per scudo per dì 65 fatta insino a dì 5 di questo in Antonio de Pazi e Francesco Tosinghi i quali rimettemo a Bernardo da Uzano e compagni per loro conto a loro, fo 168.

By the 15th century, bills of exchange were the commonest form of international monetisation in Europe. With the increasingly lucrative trade between the Ottomans and the Europeans, one would have expected this innovation to take hold in the East as well. This didn't always progress happily. There is an example of a letter of exchange drawn in Pera (Turkey) to be settled in Chios (Crete) that was rejected by the payer at Chios. Still, agents in Constantinople of European banks were quite happy to accept these letters. In 1437, a Cretan named Dimitri Argiti travelled to Gelibolu taking with him a letter for 1177 aspers. [4]

By 1460, credit in the form of letters of exchange was important even in Eastern commercial centres such as Bursa.

Check out:

1. Norman Biggs, 'Mathematics of Currency and Exchange: Arithmetic at the end of the 13th century', Gresham College, April 2008.

2. Peter Spufford, Handbook of the Medieval Exchange.

3. The Borromei Bank Research Project, Queen Mary, University of London.

4. Kate Fleet, European and Islamic Trade in the early Ottoman state.


Anonymous said...

Still dont know what credit is...

Fëanor said...

Anon: Of course, you jest. I wouldn't credit you with such ignorance.

Anonymous said...

This was also done at the great medieval fairs, such as Troyes.

All the merchants would trade for the entire fair, using just bills of exchange. At the end, the fair's operators would then to net everything out, and tell who to pay whom.

They even had their own measures to ensure accuracy. Hence we have "Troy" weight today.

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