Money (16 page)

Operating as it did within the jurisdiction of a given sovereign, the business of domestic banking was subject to the close attention of the political authorities, however. The resuscitation of a profession which specialised exclusively in financial transactions revived ancient suspicions. The medieval schoolmen, starting with St. Thomas Aquinas, devoted the majority of their writings on money to parsing Aristotle’s condemnation of lending at interest as unnatural. Even Oresme, the champion of the new monetary rentiers, was quick to
criticise the “money-changers, bankers or dealers in bullion” who “augment their own wealth by unworthy business … a disgraceful trade.”
¹⁵
Then there were the ominous lessons of the potential macroeconomic risks associated with large-scale banking contained in ancient texts like Tacitus’ account of the Tiberian financial crisis. Above all, there was the sovereigns’ interest in ensuring the continuing priority of their money, and hence their seigniorage. As a result, the new invention of banking was subjected to draconian regulation. When in 1321 the authorities in Venice discovered that merchants were practising fractional reserve banking—holding only a small proportion of their assets in coin of the state—they passed a law specifying that banks must be able to meet all requests for withdrawals in coin within three days.
¹⁶
In the same year the Catalonian authorities revised their 1300 order that failed bankers be forced to live on bread and water alone until all their clients were reimbursed. Henceforth, any banker who failed to meet his clients’ demands was to be publicly denounced—and then summarily beheaded in front of his bank. It was no idle threat, as the hapless Barcelona banker Francesch Castello discovered in 1360.
¹⁷
Under such uncompromising regulatory regimes, domestic banking really was a risky business.

Conditions were altogether more propitious in the parallel world of international banking. To begin with, international trade was the most dynamic part of the medieval economy: the aristocracy benefited first from the monetisation of feudal relations, and it was their taste for foreign luxuries that drove high-value commerce. What’s more, the great merchant house, with its resident agent in the foreign jurisdiction, its extensive operations in both countries, and its new expertise in banking, could supply the local merchant both with credit and with foreign exchange services. But most important of all, there was, by definition, no sovereign authority to regulate commerce between countries, and no sovereign money with which to transact. So it was here, in the international sphere, that banking’s potential to accelerate the commercial revolution was first fully realised. The central innovation was the perfection, by the mid-sixteenth century, of the system of “exchange by bills”: a procedure
for financing international trade using monetary credit issued by the clique of pan-European merchant bankers, denominated in their own abstract unit of account, recorded in bills of exchange, and cleared at the quarterly fair of Lyons.

The system was simple.
¹⁸
An Italian merchant wishing to import goods from a supplier in the Low Countries could purchase a credit note known as a bill of exchange from one of the great Florentine merchant houses. He might pay for this note either in the local sovereign money or on credit. By buying such a bill of exchange, the Italian merchant achieved two things. First, he accessed the miracle of banking: he transformed an IOU backed by only his own puny word for one issued by a larger, more creditworthy house, which would be accepted across Europe. He transformed his private credit into money. His second achievement was to exchange a credit for a certain amount of Florentine money into one for a certain amount of the money of the Low Countries where he was making his purchase. The bill of exchange itself was denominated in a private monetary unit created specially for the purpose by the network of exchange-bankers: the
écu de marc
. There were no sovereign coins denominated in this
écu de marc
. It was a private monetary standard of the exchange-bankers alone, created so that they could haggle with one another over the value of the various sovereign moneys of the continent. Somewhat bizarrely to modern eyes, the foreign exchange transaction included in the bill of exchange therefore involved two exchange rates—one between Florentine money and the
écu de marc
, the other between the
écu de marc
and the money of the Low Countries.

The end result was to overcome a previously insurmountable series of obstacles. The exchange-banker would accept the importer’s credit in payment, knowing him and his business well from the local market. Meanwhile, the supplier in the Low Countries would accept the exchange-banker’s credit as payment, knowing that it would be good in its turn to settle either a bill for imports or for some local transaction—and satisfied that he was being paid in the local money. Of course, the banker ran the risk that the exchange
rates of the two sovereign moneys against the imaginary
écu de marc
might change in between his issuing the bill of exchange and its being cashed in the Low Countries, but he made sure that his fees and commissions made this a risk worth taking.
¹⁹

As they continually wrote and accepted bills of exchange to finance trade between the great European cities, the exchange-bankers would accumulate credit and debit balances. The circle of exchange-bankers was a close-knit one, and willingness to allow outstanding balances to build up was therefore high. Nevertheless, to ensure a clear picture of who owed what to whom, it was necessary to have periodic offsets. These could be done bilaterally on an ad hoc basis; but the regular fairs provided a natural opportunity for a more generalised clearing—and this is precisely what they gradually became. Every quarter, the clique of great merchant houses would meet at the central fair of Lyons in order to square their books. On the first two days of the fair there was a frenzy of buying and selling, of writing new bills or cancelling old ones, at the end of which all delegates’ books were closed for the quarter and the resulting balances between the houses were verified. The third day—the “Day of Exchange”—was the heart of proceedings. The exclusive cadre of exchange-bankers would convene alone to agree on the
conto
: the schedule of exchange rates between the
écu de marc
and the various sovereign moneys of Europe. This schedule was the pivot of the entire financial system, since it was at these exchange rates that any outstanding balances had to be settled on the final day of the fair—the “Day of Payments”—either by agreement to carry over balances to the next settlement date, or by payment in cash.
²⁰

The task of a judicious exchange-banker such as the mysterious Italian at Lyons was so to transact in the first days of the fair that by the time the Day of Payments came round, he could offset all his credit and debit balances perfectly, and turn a profit into the bargain. But the real source of the exchange-bankers’ phenomenal enrichment and power was not simply their ability to speculate on the fluctuations of the fledgling foreign exchange market. The system of exchange by bills was not just a means of facilitating international trade or
foreign exchange—remarkable as these achievements were. It was something much grander, and more politically significant. Bit by bit, the exchange-bankers had assembled all the moving parts of a great machine that enabled private credit to circulate as money throughout Europe. All three of money’s fundamental components were there. Like the Argentine
Crédito
, the system had its own unit of abstract value, the
écu du marc
. It had its own system of accounting—the rules of book-keeping set out in Pacioli’s
De Arithmetica
, and the standard protocols agreed between the great merchant houses for applying it. And it had its system for the transfer and clearing of credit balances using the bill of exchange and the great clearing house of the central fair. The system of exchange by bills had become nothing other than “a supranational private money interacting with domestic public monies.”
²¹
By crowning a pan-European hierarchy of credit with the self-regulating network of their cosmopolitan but close-knit cabal, the exchange-bankers had succeeded, it seemed, in building Utopia. With their perfection of the system of exchange by bills, they had constructed a viable private money on a continent-wide scale.

The economic significance of this astonishing achievement was plain to see in both the commercial revolution that it facilitated and the fabulous wealth of the men who had built it. But there was more—much more—to the new system of bankers’ money than that. It was the harbinger of an epochal political change as well—one that would change the face of finance for ever.

Claude de Rubys, the historian of the Lyons fair, was one observer who spotted the political significance of the international system of exchange by bills: it enabled the mercantile class to escape from their reliance on sovereign money. As an experienced statesman, de Rubys was aware that control of a nation’s money was one of the most basic and lucrative sources of sovereign power. He also understood that the creation and management of private money by bankers was an act not only of economic innovation, but potentially of political revolution. The money interest was now equipped both with Oresme’s powerful arguments—the ideas of the public interest and the needs of trade as guiding principles of monetary policy—and with a potential alternative, should the sovereign refuse to heed them. The great merchant houses had discovered a means of producing an international money beyond any one sovereign’s jurisdiction. Moreover, so tightly knit was this cosmopolitan elite, and so expertly constructed its hierarchy of credit networks, that it had no need of precious metal to serve as collateral for its promises to pay. Its money was invisible, intangible, consisting only of the confidence of the small group of exchange-bankers at the tip of the pyramid in one another’s abilities to assess risks, to be able to meet payments as they came due, and to
limit the issuance of credit. This was an enemy impossible to grasp, let alone defeat—a Monetary Maquis with a real “Army of Shadows.” Now it was the money interest that could back its arguments with threats—threats to abandon the sovereign’s money if it was not managed in accordance with their interests. The boot was firmly on the other foot.

Unsurprisingly, sovereigns sought to wage a rearguard action against this new enemy. The most useful recruits were men who knew the secrets of the bankers from first-hand experience. Sir Thomas Gresham, England’s royal agent at Antwerp from 1551, was one such poacher-turned-gamekeeper. Gresham came from a prominent mercantile family. His father had been one of the chief beneficiaries of Henry VIII’s distribution of monastic assets, and had traded on these riches to become Lord Mayor of London. Gresham himself was in his own turn “a successful business man, a financial expert, and a confidential agent of the government.”
¹
His experience in the first two roles was to come to his aid in his capacity as the English crown’s financier-in-chief in the Low Countries following the financial disasters of the last decade of Henry VIII’s reign. From a high of 26 Flemish shillings in 1544, the English pound sterling had commenced a seemingly inexorable decline in value on the exchange at Antwerp, at one point in 1551 sinking to only 13 Flemish shillings—a 50 per cent depreciation in seven years.
²
Since the English crown was a major debtor in Antwerp, this precipitous decline was unwelcome: it increased the real burden of the king’s debt in the same proportion. Moreover, whilst it was difficult to deny that the English crown’s foreign borrowing might have been excessive, court opinion held—in the time-honoured tradition of government officials facing market pressures—that the real culprit was the exchange-bankers, whose low opinion of English creditworthiness was nothing but a scam to earn them unjustified profits. Most culpable of all, wrote the minister William Cecil, were none other than the mysterious Italians, who “go to and fro and serve all princes at once … work what they list and lick the fat from our beards.”
³

By 1551, the court was in despair. But Gresham had a plan. Following
his appointment as agent, he pitched the idea of an exchange stabilisation fund to be deployed to combat unwarranted depreciation of the pound sterling. He requested a secret infusion of £1,200 or £1,300 a week for the purpose. With such ammunition, he said, he could neutralise the bankers’ power to sell sterling whenever they disapproved of the English crown’s policies. The young Edward VI’s Regency Council was persuaded, and the plan was put into effect. Gresham’s ploy was certainly prescient—government intervention in the foreign exchange markets using stabilisation funds was to become a standard tool of policy in the twentieth century. Unfortunately, it was also ahead of its time in discovering the limited abilities of such schemes to succeed in the face of market scepticism. After just two months, the English government balked at the cost of Gresham’s apparently ineffectual interventions, and cancelled the programme. Undeterred, Gresham returned with a new plan; but this one was much more conventional. The foreign currency reserves of the English merchants at Antwerp were to be commandeered as a forced loan to the crown. The crown’s foreign currency debts due to the slippery exchange-bankers would be refinanced into a sterling loan from its own subjects. It was ingenious and effective—but it was an admission of defeat. The exchange-bankers could not be beaten at their own game. The only remedy was for the sovereign to exert its power of coercion over its subjects. But that could only increase their incentive to join the resistance.