The system of national fiat currencies we’ve known through the 20th century wasn’t always in place and contrary to our intellectual wont isn’t the default way of handling finance and trade. It is just a state of the monetary system induced by centuries of power consolidation by strong national governments. It is too early though to say whether this power landscape was truly disrupted by cryptocurrencies.

After reading

Power and profit — The merchant in Medieval Europe by Peter Spufford

Money in the Middle Ages by Jacques Le Goff

My thoughts on medieval trade, economy and monetary situation.

A multitude of Coinage

English Sterlings, French Deniers tournois, Venetian Grossi. Florentine Florins, Deniers Provinois, Cologne Pfennigs, English Pennies, Augustales, Genoin. Ducats, Billons, Denier Parisis, Quattrinos, The gold Ecu.

These are just a few of the coins circulating in Middle age Europe. With such a multitude of coins, there is an immediate issue of pricing. Say that over a long period of time, a local currency such as the Grossi establishes a stable exchange price with products such as bread and wine. But then the price can be disrupted in so many ways:

A large quantity of African or Asian gold arrives in Europe, and all gold coins are experiencing devaluation

The local king decides he wants to go to war or finance his luxurious way of life, so he mints more coins with lesser gold content, thus devaluing all such coins. In a way the king is then forking the coin with a different parameter of gold content. Though the original coin holders still retain the original high gold content in their coins, many merchants might not be able to differentiate the old and new coins, and so the original holders’ value would be diminished unless they go all the way to extracting the gold content of the coins. Notice though that issuing more coins with the same gold content doesn’t devalue the old coins, contrary to what happens with Fiat money where money printing causes inflation. This is like a trust-minimized gold standard, when instead of trusting the government to redeem your dollars for a certain amount of gold, you get your dollars with this amount of gold in the first place. You do need to verify you got the right amount, and you’re still susceptible to future manipulation as you’re not holding a gold or silver ingot directly, but a secondary coin, that establishes its own credit and reputation among merchants, so if many devalued coins appear in the future due to the minter manipulations, your old and valuable coin might experience devaluation anyway because of the bad experience people had with its devalued kins.

As fixed exchange rates were set by the local kings between different coins, changes such as the above happening in one coin could percolate into other coins

Times of the year could introduce large fluctuations into a coin’s price. Large fairs and different seafaring seasons brough higher and lower price trends.

This all paints the picture of very irrational market and financing conditions. By irrational markets I do not mean the Kahneman or Dan Ariely notion of people acting against what Game theory would have expected them to do, but more in a sense of the french enlightenment struggle to unify metric systems of weights and distances. There was no financial metric system in the middle ages and prices were not molded out by efficient finance markets. And so holding a coin didn’t guarantee its value, and a wise merchant would have to constantly consider whether his holdings are still of value. The little guys in the towns or villages that didn’t have the opportunities and know-hows had no other choice under such circumstances but to rebel and there were actually many rebels revolving around monetary issues. Very different from today when people that actually have the votes wouldn’t usually consider monetary policy high in their agenda.

It is worth noting that besides the obvious reason for the multitude of coins, namely that of the fractured power structure where every local king wishes to mint coins to gain monetary control, there were other reasons to have different coins. Merchants going about needed large value gold coins, while local farmers engaging in miniscule activities such as buying food for their family needed pennies.

Banks borrowing as an easy form of taxation

Levying taxes was very hard in the middle ages. You could say that the west has seen a 1000-year struggle to impose taxes that culminated to today’s modern serfdom. In the middle ages it was still like putting reins on an untamed horse. Whatever tax you may think of, whether wealth, estate, income, consumption, all faced strong opposition and violent protests. There was a hack to it though. As banks became prominent and managed large sums of money, a king could demand the bank would loan to him, while knowing he would eventually default on his loans. As the banks already had the network and ability to attract everyone’s finance — at least anyone who had enough finance to need bank services — they were an easy and useful prey.

“Taxation was essential to the functioning of a royal or communal regime, but it was difficult to impose and the princes were forced to resort to borrowing, which doomed Christendom to a state of almost perpetual crisis. Edward III of England borrowed from the Bardi of Florence, which eventually drove them into bankruptcy. Charles VII, in order to rebuild France after the Hundred Years War, borrowed from Jacques Coeur, then had to imprison him so as to avoid repaying him …” (Le Goff, p. 113)

The debate on usury

It took a long time to legitimize loaning with interest, and it never became fully legitimized during the middle ages. The argument being that time belongs to god and so one can not profit from using god’s resources. Or some other form of scholastic dribble. Eventually usury was justified by the risk and capital costs aspects of it, namely the fact that you might lose your money loaning to others so you should be compensated for this risk, and also the fact that you could have other investment uses for the money at the time of the loan so you should be compensated for your lost profits. I still would see that as an apologetic justification for loaning with interest, which should be — it’s a free and voluntary market, and when someone takes a loan in order to make a profit the amount of profit that should go to the entrepreneur and the amount of profit that goes to the capital investor should be freely negotiated and can end up being more in the capital investor’s favor, and that’s ok.

The Christian roots of Socialism

Mixing economics with high values and justice leads to bad economics, and the middle ages were filled with high values and justice. Setting up prices, spending vast amounts of money on white elephants with no economic value like the Gothic cathedrals — compare — The Soviet space program, The ideal of voluntary poverty and the constant propaganda against legitimate financial actors such as lenders, merchants and money changers, are all inclinations that manifested themselves both in middle ages christendom and in socialist societies. I believe the demonization of financial actors served the kings well, as it preserved their monopoly over power. Merchants were the missing ingredient of medieval society to overthrow serfdom. If a new economic system has emerged, where farmers could easily trade their excess production, the new rich could eventually attain military power and sideline the kings — this is basically the story of 1250–1800. In socialist societies ‘The Party’ is always in fear of being sidelined by the uncontrollable realities of the free market.

Was late-medieval Europe capitalistic ?

Jacques le goff think it wasn’t, but I strongly disagree with his reasoning. He gives three reasons for his perception of the middle ages as totally non-capitalistic and not even pre-capitalistic: The shortage of precious metals, the fragmentation of coinage and the fact that Amsterdam’s stock exchange came to existence only at 1609. Honestly, these are ridiculous arguments. Money supply is an aspect of the economy and economic structure, but it’s just another market, just like fresh fruits or animal fur. You wouldn’t say an economy’s structure is non-capitalistic because the volume of trade in fresh fruits is small, right ? Also, does the fact that the trade in mangos, pineapples and oranges is similar in scale and there’s no consolidation to ‘one fruit’ means the economy is non-capitalistic ? Precious metals answer a need for a reliable medium of exchange, but their shortage or the diversity of coin minting doesn’t implicate much about the economy’s structure. Is the world of cryptocurrencies today non-capitalistic because there are many coins? Regarding the stock exchange, beurse have existed in many cities before the Amsterdam stock exchange. Le goff is treating the Amsterdam stock exchange as if it was the temple mount, and as if no sacrifices existed . The commercial revolution of the 13th century brought forth many financial institutions, including shared ownership of companies and trade in stocks and fractions of stocks. A 1531 petition regarding the location of the Antwerp Beurs claims that

“Merchants would rather have it placed nearer to the waterfront, just as the bourses in other great merchant cities are placed, as in Venice, Genoa, Naples, Palermo, Lyons and particularly Bruges” (Spufford, p. 52).

But even if a main meeting place for exchanging stocks never existed, does it matter ? Did fruit trading never existed before modern containers ?

What about this implicating quote by early 15th century Bernardino of Siena

“Money has not simply the character of money; but it has beyond this a productive character, which we commonly call capital” (Spufford, p. 44)

In 14th century Venice you could even find a form of fractional reserve banking.

“By 1321 it was apparent that some Venetian bankers were reluctant to pay out cash, instead of making transfer between accounts … By allowing overdrafts and thus letting their cash reserves fall below, and often well below, the total of their deposits, such local deposit bankers were not only facilitating payments, but also effectively increasing the money supply” (Spufford, p. 39)