Banks and Money

Introduction

It's all about the money.

First let's just take a stroll around the topic, raising some questions but mostly leaving the answers for later. Then I'll address the topic of money and banking.

Questions

How did people make a living?

Agriculture. That's the answer you will usually get, and it's right as long as you don't picture agriculture in modern terms. Most people in the Middle Ages lived on farms—estimates run at around 80% though the number varied depending on region. What sort of agriculture was it?

It was not subsistence agriculture. That is, people did not produce everything they needed right on the farm, or even in the village. Sometimes they needed goods and services from beyond the community, so even out in the countryside people needed money. They had to pay taxes and rents, they had to buy tools that could not be made locally, they had to buy oxen and other livestock, they had to buy metal goods such as needles or pots, and so on.

How did they get it? By selling surplus goods and labor. From their kitchen garden, eggs, milk, cheese, wine, olives, fish, all these things could be sold, usually at a local market once a week.

Who did they sell to? Each other, naturally, but also towns and courts—any place that consumed more than it produced. Village artisans also depended on this local market: the woodcutter, blacksmith, etc.

In addition to local markets, they might sell to itinerant merchants and peddlars, or they might go into town and sell there if it were near enough.

Living in the City

How did most people make a living in a town? There are more varieties of economic activity in a town. One large part of the population was unskilled labor. These were the people who sold what others made (fishmongers, rag sellers, vendors of a whole variety of agricultural products). They were carters and porters, day laborers, and the unemployed. They were terribly poor and in general were not citizens but were merely residents.

A large part of the citizenry were artisans, members of this or that craft. There were *lots* of crafts: in Augsburg, Germany at the end of our course, over sixty incorporated crafts are recorded.

Then there were merchants. These might be strictly retail, such as bakers or millers, or they might be wealthy merchants engaged in international trade at the wholesale level; or they might be any of the middling sort like butchers or ironmongers or apothecaries, who might occasionally do business at the regional level.

There were employees as well, or members of institutions. Among these were members of the clergy, who had some sort of income stream in the form of benefices. That money was generated from a variety of sources, including tithes, taxes, tolls, investments, and sale of goods—in short, income much like what the nobility enjoyed. That income might be generous or very thin. There was little money in government work—most positions were unpaid. Finally, businesses had employees, principally journeymen who worked on contract that could vary from one day to months or even years.

Court and Church

I've already indicated that the clergy enjoyed incomes from various sources. The combination could vary wildly. Some might get no more than a portion of the tithe (a parish priest, for example) while others might enjoy income from vast estates (the abbot of a wealthy monastery, or the bishop of a great cathedral, for example).

So it was with the nobility. At the lowest end, a nobleman might be little more than a comfortable peasant, having a single farm that he worked himself. At the high end, a noble would have estates far and wide, each one generating income (and costs!). In addition he might have investments (in Italy many nobility entered into commerce). He might also have natural resources to exploit: fish from his streams, or timber from his forest. That same forest might provide charcoal for ovens that in turn supported a foundry. He might have mines producing copper or salt or silver. He owned mills and got a percentage of what was milled there. In addition to all these, the peasants on his estates paid rents and donatives ("gifts" in kind such as livestock or foodstuffs; the days of forced labor were largely gone from western Europe).

As you can see, there many sources of income for the propertied classes. They spent their money the same way we all do, on the necessities of life and on the luxuries. We might not agree on what was "necessary" but then they probably wouldn't think some of our necessities are all that necessary either. The higher up in the nobility one was, the more "extra" expenses one had. The nobleman had to bear the expenses of war, for example. He had to pay for a variety of court rituals and events. He had to be "liberal", which is to say he had to give away wealth and be seen doing it. This meant not only pious donations to the Church but also gifts to other nobles and to his clients and dependents. Being rich was not a static condition but one which involved a constant river of goods and cash coming in and flowing out again.

Much the same was true for members of the upper clergy, most of whom were in fact sons of noble families. Entertaining, patronage, even bearing the costs of war (for where property is involved, there will always be property disputes), all were among the expenses of a cardinal or bishop.

Summary

I hope the foregoing has demonstrated that currency flowed through the entire economic body of Europe. I hope it has dispelled any notion that we are dealing with a barter economy or a moneyless economy.

Money had been used throughout the Middle Ages. There was a time when it had been less important, but from around 1100 or so, money became increasingly important as both trade and cities grew at a steady pace. Whether it was pennies or pounds, money was needed in every part of Europe and by nearly every class. Indeed, one of the hallmarks of being "poor" was to have no coin whatsoever. The poor lived on what others provided.

Since money made the world go round, and since banks are all about storing and moving money, we will turn next to this question: what's money? More particularly, what forms did money take in the period we are studying?

Types of Money

Medieval money can be divided into two distinctly different types: the kind that existed and the kind that didn't. Real money was currency and specifically coins of various qualities and weights. The other kind was called "money of account" (on account of I ain't got none). This was purely an accounting unit, used for large-scale transactions and never turned into a physical object.

Currency

By far the most common coin throughout the Middle Ages was the silver penny, known in Latin as the denarius. The word was preserved in the Romance languages as the denier in French, the dinero in Spanish, denari in Italian, and denar in Hungarian. The Germanic languages had their own term: pfennige in German, penningen in Dutch, and pence or penny in English. The coin was typically quite small. Now that you know the term and the coin, you understand why pence in English is abbreviated with a lower-case d, as in: £5 3s 5d. The "s" is for shillings.

Big Penny

In the 13th century a larger coin came into existence, known in English as a groat (groschen, gros, gros tournois). The word simply means big and the coin was colloquially known as the "big penny." It was typically worth four pennies.

All this was silver. No gold coins were struck in the West since the fall of the Roman Empire. Gold coins were in circulation, of course, but the West simply made use of existing coins as well as new coins from Byzantium or Islam. Silver was sufficient, along with money of account for large transactions.

The first gold coins were struck in Florence in 1252 and were called florins. Gold coins had also be occasionally struck as commemorative pieces for big events, but this was the first that was intended as currency. By our period, there were three types of coins: gold, silver, and debased coin also called "billon".

The English gold coin was the noble, whose value was fixed at 1/3 of a pound and which was first struck by Henry VII in the 1480s. The French gold coin was the franc. In the Rhineland it was a gulden. In Venice it was the ducat. In general, the florin was the most widely used standard. It was gradually superseded in the 15th century by the ducat (first issued in 1284).

Debasement and Cutting

Silver coins were steadily debased all through our period, in some cases to the point where they had only 1/96th of their 13thc silver content. Copper was mixed into the coin to such an extent that this debased coinage was known as "black money" (another term you may see is "billon"). Only the English penny stayed fine silver. Groschen generally fared better. Where there was more silver than copper, it was known as "white money". For example, the groschen of the Rhineland were called "white pennies" (Weisspfennigen).

Money was also debased through the process of clipping. As you might guess from the images you've seen so far, it was possible with some coins to trim away the edges. Do this with enough coins and you have enough silver to turn a nice profit while still passing the original coins at their original value. This was strictly illegal and getting caught meant mutilation at best, or even execution.

Money of Account

Began appearing as early as the 8th century, but was in wide use only by the 12th century. The basic units were completely unrelated to coinage, but again an old Roman coin formed the historical basis. This was the solidus, which we find as soldo and sou and shilling (12 pennies = 1 shilling). The other money of account was the pound, which in Latin is libra which is why the English pound symbol is £. The libra appears in Italy as the lira and in France as the livre. Again, German had a different word, the Pfund. A third money of account was the mark, which was a bit more valuable, coming in at 160 English pennies (13s 4d), but the rate differed from one location to another.

As I mentioned, money of account was used only for accounting purposes. Since it had a larger value, it was easier to do the bookkeeping for large-scale commercial transactions. At some point, if cash were needed, the money of account would be turned into currency by a moneychanger.

The Creation of Money

Who created money? In theory, the power to coin belonged to the king, but kings had for centuries granted this right out to lords and towns and even abbeys. By our period, there were dozens of entities around Europe that were issuing coins.

In every case, though, the entity issuing the coins had to have a document authorizing them to do so. As with other medieval documents, these sometimes were forgeries, created to legitimize a long-standing practice. The lord (or town) then contracted with a specialist who did the actual minting. There were real mints—that is, actual buildings dedicated to creating coins—but sometimes coins were simply created at a goldsmith shop or whatever.

Moneychangers

As you might guess, with all those different coins, knowing how to convert from one currency to another was a fairly technical business. That business was handled by a moneychanger. In Florence and other north Italian towns, the moneychangers set up shop at markets and near merchant establishments, sitting on benches that in Italian are called banca. That's where we get the term bank.

Moneychangers not only knew how to convert currencies. They also had scales and could weigh coins to ascertain their real value. Since they tended to have a fair amount of hard cash on hand, they naturally got into the business of making loans. They also had strongboxes and the ability to keep good records, so they became holders of deposits. A visiting merchant would rather leave his cash with a moneychanger than to keep it in a bag under the bed at the inn!

As with modern currency conversion, moneychangers charged a percentage of the transaction for their services. It was normally quite modest, only a percent or two, but it was enough to make a nice living. Even after the development of banks, moneychangers continued to play a role, but they tended to deal mainly with regional commerce and to lend money in small sums.

Early Banking

Since a moneychanger did most of the things associated with banking, it's impossible to say exactly when or where "banking" started. In the thirteenth century, certainly. Along the northern shores of the Mediterranean, certainly, particularly in Italy and Catalonia. When you hear someone say that banking started in Genoa or Barcelona, they're speaking of a formal institution with a name and a charter. But families were doing banking all through the 1300s, and you should really think more about the family than about the bank. That is, family members and employees might have offices in several cities. In each city was the ability to raise money, keep and track money, and disburse money. The principal function was to serve the family business, but this often entailed providing financial services to partners and clients.

We think of a bank as a building with money in it, and there were such places, at least by the 15thc. Mostly, though, were buildings owned by families and somewhere in the building would be a locked room or rooms that held locked strongboxes. If you think about it, even a modern bank is like this. The room with the money is only part of the building's function. There are also offices for negotiating loans, one or more room for storing valuables, perhaps an investment office, and so on. But to make the modern parallel work, it would be more like each major company had its own bank, for there were very few independent banks. The ones that existed were operated by the city, such as the Bank of St George in Genoa.

The other really noticeable difference is that while banks did store currency and valuables, they didn't pay interest on those deposits. They simply provided safe storage and good accounting. As we'll see in a bit, this was a vital function for long-distance trade. Ordinary folk did not put money in banks, and the bank draft (or signature cheque) had not yet been invented.

A Bill of Exchange

The real function of a bank was that it facilitated commerce. In earlier centuries, merchants tended to travel with the goods they were selling. They travelled in wagon trains of various sizes, often forming partnerships with other merchants to hire not only transport but protection as well. The Florentine merchant who wished to sell spices or jewelry in Bruges actually travelled to the city. He may well have written to someone or even have a representative in Bruges, who had assured him of a good market and perhaps arranged some meetings. Upon selling the goods, the merchant was paid in currency. He either returned home with his strongbox, or more likely he then used some of that money to make some purchases for the purpose of sale back home in Tuscany.

This sort of travel obviously was not very efficient. There was a practical limit on moving goods, for the merchant could travel only so many times a year. This also limited how many markets he could exploit. Travelling with money was always chancy, as the Robin Hood legends make clear, and while the merchant was gone he could not also be tended to the business back in Florence.

The famous fairs of Champagne developed in the 12th century in response to this. The fairs were held at fixed times and operated according to their own laws (local customary law rarely had much to say about resolving commercial disputes). With so many merchants from so many places gathered together, the Florentine merchant could exploit more markets per trip. Still, it was limited, and by 1300 the Champage fairs were in decline.

They were being replaced by partnerships and family businesses that learned to do commerce at a distance. Our merchant of Florence still had his factor in Bruges keeping him informed, as did the Brugeois have their Florentine factors. When a deal was to be done, it was done by letter. The goods were shipped by hiring professional transporters. Most importantly, though, no money moved between the cities. Instead, money was moved from one account to another, between banks in Bruges and in Florence. The device that made this possible was called a bill of exchange.

An exercise

A wishes to borrow money in order to make purchases and do business. Borrowing gets into usury; a bill of exchange is better. By it, A buys a bill of exchange from Banker B, payable in Barcelona 60 days hence. A now has cash and can buy stuff here in Bruges, ship it to Barcelona and sell it at profit. Banker B still needs to be paid back, though.

A's agent C in Barcelona draws up a second bill of exchange, a recambium, which orders Banker D to draw out Amount Plus and pay it to Banker B in Bruges 60 days hence (120 days from original borrowing).

An Example Here is the cambium In the name of God, amen 12th of December 1399 Pay at usance by this first [letter of exchange] to Domenico Sancio six hundred écus at 10s 5d [Barcelonese] per écu, which 600 écus at 10s 5d per écu are for the value received [here] from Jacopo Goscio; and charge [this amount] to our account. God be with you. Giovanni Orlandini and Piero Benizi and Co. in Bruges. Accepted, 11th of January 1399 [1400 n.s.] [on the back] Francesco da Prato and Co. in Barcelona First [letter of exchange] And the recambium In the name of God, amen 12th of February 1399 [1400] Pay at usance by this first letter of exchange to Jacopo Goscio [the sum of] 625 écus at 10s 0d Barcelonese per écu, which 625 écus at 10s 0d per écu are for the value received here from Domenico Sancio; and charge this amount to our account. God be with you. Francesco del Tovaglia and Co. in Barcelona Accepted, 11th of March 1399 [1400] [on the back] Giuliano Zaccheria and Co. in Bruges First [letter of exchange] 1) at usance: normally 60 days, but 30 (half-usance) 90 and 120 were also common 2) the écu: [= shield], with the symbol . Here it was not the famous French gold coin, but rather a Flemish money-of-account or system of reckoning equal to 22 current Flemish silver pence = 22d = 1s 10d gros of Flanders. 3) Moneys-of-account: both Flanders and Barcelona then used the almost universal system of money-of-account, by which one pound of money (livre, lira, pond, Pfund) contained 20 shillings; and each shilling, 12 pence: so that £1 = 20s = 240d. 4) first letter of exchange: to insure the transaction against theft, loss, or fraud, several bills, each numbered consecutively, would be issued. This bill was thus the first to be issued; and if it arrived safely, it would be the one redeemed, thus cancelling the subsequent bills. 1. The deliverer or remitter (datore or rimettente): Jacopo Goscio in Bruges, who lends or 'delivers' 600 écus, worth 1s 10d or 22d gros Flemish each. The total value = 600 x 22/240 = £55 0s 0d gros Flemish; and this sum is lent to Giovanni Orlandini-Piero Benizi Co. in Bruges by 'buying' a bill of exchange from them drawn on Barcelona. 2. The taker or drawer (prenditore or traente): The Orlandini-Benizi Co. in Bruges, who thus borrow the 600 écus by `selling' the bill of exchange to Jacopo Goscio; they `draw' this bill upon Francesco da Prato and Co. in Barcelona. Presumably the Orlandini-Benizi Co. maintain funds on deposit with the Francesco da Prato Co. bank in Barcelona; and thus, in effect, the Orlandini-Benizi Company, by this bill of exchange, is selling a claim to this foreign bank balance -- a claim to its funds on deposit there. The Orlandini-Benizi Company would use these borrowed funds to purchase Flemish woollens, which they would ship for sale to Barcelona, depositing the proceeds from the sale in its bank account with Francesco da Prato and Co. there. 3. The payer or drawee (pagatore or trattario): Francesco da Prato in Barcelona, who 'accepts' the bill on 'sight' on 11 January 1400, thus agreeing to make the stipulated payment at usance, on the bill's maturity, to the designated payee in Barcelona, Domenico Sancio. This payment will be made in the currency of Barcelona at the stipulated rate; and the amount to be paid is: 600 écus x 10s 5d Barcelonese = 600 x 10.4167s = 6,250s = £312 10s 0d Barcelonese currency. Note that this payer is also extending credit to the drawer (taker), since he is guaranteeing payment, even if the drawer fails to deposit sufficient funds in his account with the payer in time to redeem the bill. Normally, however, the drawer would maintain a sufficient balance in his bank account; and, as noted above, the drawer was thus selling a claim to this foreign bank balance. Francesco da Prato might also act as the mercantile agent for the Orlandini-Benizi Co. by arranging for the sale of the imported Flemish woollens. From the proceeds of that sale, as also noted above, he would be able to redeem the bill of exchange, without endangering his bank balances. 4. The payee (beneficiario): Domenico Sancio in Barcelona, who received the bill in the mail from the deliverer, Jacopo Goscio, and he presents it for `acceptance' to the payer. On the bill's maturity, he 'collects' the bill, worth, as noted above, £312 10s 0d Barcelonese. The records indeed do show that on 11 January 1400, the date of acceptance, this sum of £312 10s 0d Barcelonese was charged to the account of Orlandini-Benizi and credited to the account of Domenico Sancio by Francesco da Prato. This sum was paid to Sancio on 11 February 1400, by 'assignment in bank' or bank-account transfer. B. The recambium: the second or return bill of exchange 1. The deliverer: Domenico Sancio, who was the payee in the original cambium. He lends the proceeds of the cambium, £312 10s 0d Barcelonese to Francesco del Tovaglia in Barcelona by buying from him a bill of exchange drawn upon Bruges. He is thereby able to remit these funds to the original deliverer, Jacopo Goscio. 2. The taker: Francesco del Tovaglia in Barcelona, who thus borrows the said sum of £312 10s 0d Barcelonese by selling a bill of exchange drawn upon Giuliano Zaccheria in Bruges. Del Tovaglia might use these borrowed funds to buy Spanish wine and leather for export to Bruges. 3. The payer: Giuliano Zaccheria in Bruges, who accepts the bill on 11 March 1400, agreeing to redeem or pay the bill on its maturity, to Jacopo Goscio in Bruges. He might also act as the commercial agent for del Tovaglia, selling the imported wines and leather from Spain, and thus using some of the proceeds to redeem the bill. Again, he acts as a bank-creditor for the drawer. 4. The payee: Jacopo Goscio, the deliverer on the initial cambium, who presents the bill for acceptance and then 'collects' the bill on its maturity, 11 april 1400, for the sum of 625 écus = £57 5s 10d gros Flemish. That is, £312 10s 0d Barcelonese divided by 10s 0d = 312.5/0.5 = 625 écus x 22/240 = 625 x 0.09166 = £57.29166 = £57 5s 10d. gros Flemish. Calculation of the Rate of Interest or Profit on the Bill. The interest or profit was included within the exchange rates. In this example of cambium and recambium, the original deliverer Jacopo Goscio has made a profit of 25 écus (625 - 600), or £2.5s.10d. gros Flemish, for a period of four months. His per annum rate of return would thus be: 12/4 x 25/600 x 100 = 3 x 0.041666 x 100 = 12.5%. Assume that the actual rate of exchange on the Flemish and Barcelonese currencies was mid-way between the two rates quoted in these bills: 10s 2 1/2d Barcelonese per Flemish écu, so that 600 écus = 600 x 122.5/240 = 600 x 0.510417 = £306 5s. 0d. Barcelonese. (a) the profit on the first bill would be: £312.500 - £306.250 = £6.250 or £6 5s 0d Barcelonese = 12.245 écus. (b) the profit on the second bill would be: 625 écus - 612.245 écus = 12.755 écus [= £57.292 - £56.123 = £1.169 = 12.755 écus]. (c) the total profit on the two bills was thus: 12.245 + 12.755 = 25.000 écus, as calculated above. Bills of Exchange – Summary Bills of exchange are essentially promises to pay. If the relative values of the currencies involved stayed stable, then the fixed profit was profitable, but it was entirely possible for some local catastrophe (especially war or famine) threw the numbers severely out of whack. This made business correspondence extremely important, as a way to manage risk. This is also what got around the usury laws. Bills of exchange gradually became valuable in their own right. They could be signed over to someone else and could even be bought by someone else. This is because someone else might have the notion that the bill would bring more than what they paid for it. We are too early for a bourse or an exchange, but we see the early stirrings of money markets that would become very big business by 1600 and after.

Bookkeeping

How does this sort of business get recorded?

The real question is: after a year of such business, did we make any money?

There's a real drive because many business partnerships last only a few years.

Transaction Journals

A chronological journal of all transactions: borrowing, buying, selling, all mixed in a single book. You would have to go back through and do a running total in order to figure out how much you made.

Worse, various transactions (e.g., loans to a family member) may not have been recorded. The result was that merchants often didn't know if they were profitable, they only knew if there was money in the strongbox. This is the way lots of nobles and even princes ran their treasuries, too.

Double-entry

Italians developed this. We have a 15thc book on the technique, but the practice is surely older than that.

Credits and debits kept in columns. All you did was add them up. The loan and the repayment were on the same line, just recorded at different dates.

Conclusion

These techniques developed first in the Mediterranean. One reason why the Italian merchants were ahead of their northern rivals.

These business transactions required that merchants be literate and numerate. It required that they be able to keep complex records and understand that their net worth was something more subtle than just looking in their strongbox and counting up their coins. This gave a certain ethos to the large-scale merchant not shared by the nobility or by the local merchant or craftsman.

It's worth noting that the Italians and the Catalans were the pioneers in these techniques, and that the Germans were well behind.

The effect of the spice trade was not what made Italy the richest part of Europe. It's entirely possible to get rich on bulk goods like timber or furs or grain. The difference was that the Germans were very slow to adopt some of the Mediterranean techniques and this put them at a disadvantage. They couldn't move as fast. They weren't able to build up the same cash reserves.

The northerners didn't overtake the Italians until the 17th century. And by then, they also had a line on Far East trade and were dealing with much greater levels of wealth.

Here is the cambium In the name of God, amen 12th of December 1399 Pay at usance by this first to Domenico Sancio six hundred écus at 10s 5d per écu, which 600 écus at 10s 5d per écu are for the value received from Jacopo Goscio; and charge to our account. God be with you. Giovanni Orlandini and Piero Benizi and Co. in Bruges Accepted, 11th of January 1399 [on the back] Francesco da Prato and Co. in Barcelona First And the recambium In the name of God, amen 12th of February 1399 Pay at usance by this first letter of exchange to Jacopo Goscio 625 écus at 10s 0d Barcelonese per écu, which 625 écus at 10s 0d per écu are for the value received here from Domenico Sancio; and charge this amount to our account. God be with you. Francesco del Tovaglia and Co. in Barcelona Accepted, 11th of March 1399 [on the back] Giuliano Zaccheria and Co. in Bruges First

Silver Penny
Latin	denarius
French	denier
Spanish	dinero
Italian	denari
Hungarian	denar
German	pfennige
Dutch	penninge
English	pence, penny

pound = £

shilling = s

pence = d

Example: £5 3s 5d

groat = groschen = gros = gros tournois

Gold Coins
Florence	florin
Venice	ducat
England	noble
Germany	gulden
Netherlands	guilder

billon

Weisspfennigen = white penny

Debasement and Cutting

solidus = soldo = sou = shilling

libra = lira = livre = pfund

mark

banca

Early Banking

Catalonia, Barcelona, Genoa

Conclusion

Bills of exchange are essentially promises to pay. If the relative values of the currencies involved stayed stable, then the fixed profit was profitable, but it was entirely possible for some local catastrophe (especially war or famine) threw the numbers severely out of whack. This made business correspondence extremely important, as a way to manage risk.

Bills of exchange gradually became valuable in their own right. They could be signed over to someone else and could even be bought by someone else. We are too early for a bourse or an exchange, but we see the early stirrings of money markets that would become very big business by 1600 and after. It is too early to speak of capitalism, but the bill of exchange helped create the soil out of which the capitalist system would grow.

It's worth noting that the Italians and the Catalans were the pioneers in these techniques, and that the Germans were well behind. The effect of the spice trade was not what made Italy the richest part of Europe. It's entirely possible to get rich on bulk goods like timber or furs or grain. The difference was that the Germans were very slow to adopt some of the Mediterranean techniques and this put them at a disadvantage. They couldn't move as fast. They weren't able to build up the same cash reserves. The northerners didn't overtake the Italians until the 17th century.