They are a bit outside the scope of the question, but I don't mind adding my thoughts on them.
Large scale trade in Europe started taking off with the establishment of the empire of the Franks. Roads became safer and merchants better organised. The coins in circulation were small silver pieces, hard to count, easy to lose. The first treasure that gives us an idea of how the problem was solved is the hoard of Pimprez. It is dated to around 1140 and consists of silver ingots and silver Carolingian denarii.
The ingots serve as large scale payments and went by weight, because in subsequent treasure troves, their weight is seen to standardise on the Mark. Unfortunately, there were a large number of different weight standards, all called a mark. Metal content standards also concentrate on a limited number of values, but these remain locally determined. Mediterranean countries used 925, Nordic countries 940 and Eastern Europe preferred 980.
From 1160, a succession of new silver discoveries, notably in what is now Germany, increased the money supply, stimulating economic development. Bars became more prevalent and many were now marked with anything from a coin die to where to cut the bar to obtain halves and quarters. The use of bars was not restricted to Europe. The Eastern European standard of 980 fine spread to Asia. A 13th century traveller mentioned Chinese bars of "ten marks".
As Central and (later) Western Europe began to develop, mediterranean merchants started to show more interest in them. First among them were the Venetians. Their great invention was the embassy, a World Trade Centre of the middle ages, providing services and safety to visiting Venetians - at a price. The Venetian embassies covered trading routes from Napels in the South East to London in the North-West, with the more important embassies in Naples, Florence, Milano and Bruges. Similarly, Burgos covered the Iberian peninsula, Constantinople covered the entrance to the back sea. The important market towns of Nuremberg and Augsburg were gaining in importance, due to the constant inflow of Harz silver, competing with the Venetians in the Geneva-Paris region.
While a vast improvement over Carolingian times, the standardized bars still had to be re-melted at least once, to match local weight and fineness standards. An essentially local invention came to the rescue: the
instrumentum ex causa cambii. Originally, this was simply an order to pay from a merchant to a banker (often a wealthy money changer.) The receiver would use it to go to the banker and collect. The value of the paper was based on the reputation of the merchant. Banks could be trusted, because insolvent bankers were beheaded in front of their own house, crude, but simple and efficient.
Once it dawned on merchants that they could trust a known quantity in a faraway embassy just as much as a neighbouring family, these payment orders are comparable to present-day bills of exchange. Such paper bills obviated the need to transport and re-melt precious metal. Since they were addressed to named persons, they could be stolen, but only cashed by the named person, making them safer than silver or gold. The bottleneck was trust. By 1350, ingots had disappeared from international finance in Europe, to be replaced by paper.
The bills of exchange subtly changed the financing scene in North-Western Europe, the new economic power centre after the fall of Byzantium. Money-changers found a new occupation as what we would call today deposit bankers: a party that would accept bills of exchange. That changed the trust equation. Rather than having to deal with this or that merchant family, a merchant could deal with one deposit bank for al the merchant families in town. The result was spectacular. One researcher (Hanham) notes that in 1484, merchants from Holland came to Calais with just enough money on them for travel expenses. They bought wool from England and paid with paper bills drawn on the house of Jacob de Bloke in Antwerp, where they had an account. De Bloke paid off the owner of the wool, the Cely family, based in London. Deposit bankers like the De Medici family could leverage their wealth into royalty.
In this sense, bankers networks were at once the enablers and the restrictions of trade networks. Individual networks had to be connected to become more widespread and efficient. This was achieved by couriers: common "postal" services that sent payment orders from one city to another. A central figure in the courier networks was Jacob Fugger, himself a banker. The
house of Fugger could finance a war by shifting capital in his network and work itself into nobility. However, when he financed a disastrous, losing war (the thirty years war) and didn't get repaid (there was no recourse on the Holy Roman Emperor,) even Fugger proved to be vulnerable.
The last invention in the pre-banknote era was made by the
Bank of Amsterdam in 1609. It allowed merchants to keep accounts in bank money. Depositors could take silver coin into the bank, which accepted the coins at actual silver weight (gross weight times fineness) minus a handling fee. The bank would pay out in local coin, converting bank money into the same amount of silver, in local coins. Re-melting had become a thing of the past even for small amount, to the chagrin of mint lords, who saw part of their income disappear.
It took a gambler to take the final step towards the banknote. The Scotsman
John Law, run out of England because of an unfortunate duel, found refuge in Venice, where he became involved in the state lottery. He combined his knowledge of gambling with his gift for mathematics and developed a theory that wealth was in goods, not in money. Therefore, as long as money was trusted, it could consist of any metal. Paper money would be trusted as long as people trusted that the paper could always be exchanged for precious metal, but not all people would want to convert their paper at the same time. After the failure of the Banque Générale, Law's name was Mudd, but in fact he was right, except for two important details. First, rulers cannot be trusted to maintain the convertibility of paper into precious metal. The kings of France - not Law - issued such enormous quantities of assignats that trust was undermined. The lesson was that central banks had to be independent. Second, Law had not foreseen the bank run. The lesson is that banks can become a risk for the whole financial system when they fail, so they need supervision from a central bank, who can, if necessary, bail them out of a liquidity crisis.
Ironically, the place that most reviled Law, was the most instrumental in establishing both banknotes and fiduciary money: London. The reason is obvious. Britain should have lost the Napoleonic wars. France was bigger, more populous and richer and its political message of sovereignty of the people and human rights was far more attractive than British conservatism and a class society. So why could Wellington win? Because France, under the influence of the failure of the Banque Générale, restricted itself to a sound currency, the Franc de Germinal. Its issues were covered by gold in the Banque de France, leaving Napoléon always strapped for cash. The Bank of England, meanwhile, withdrew all gold coins and issued paper instead, making Wellington financially independent. In 1810, Wellington had a Chinese wall built to stop French troops from taking Lisbon, the
Lines of Torres Vedras. This work had to be financed immediately by precious metal. It could be done by issuing paper back home. Napoléon could never have done that.
When, after the Napoleonic wars, the Bank of England wanted to re-introduce gold, they failed. People were used to paper and found it more convenient. Subsequent gold coins were issued for speculation only.
Peter
