The Evolution of Monetary History (II): Credit Debt and Financial Innovation under Religious Revolutions

This is the second installment in the evolution of monetary history, and the article will focus on medieval European popes and early capitalist societies, considering monetary competition, religious wars, and a range of financial conceptual innovations under secular medieval monarchs.

As the Roman Empire fell apart, the religious power of Christianity and Islam increasingly spread through the soil of the old empire, causing a steady stream of wealth to flow into the hands of churches, monasteries, and other religious institutions, while these large concentrations of precious metals continued to enhance the authority of religion, gradually creating a rigid hierarchical system known as feudalism. Prior to this, the Roman Empire had left a legacy of slavery, and although it was wiped out in the later part of the empire, the vast majority of slaves were reduced to an inferior class, working for landowners for life.

In the medieval feudal system, there were two most important resources, land and power. Both of these elements came from royalty, as the king was the representative of God’s will. Each king would distribute land to various nobles of prominent families, who in turn would distribute a portion of the land to the lords, who in turn would serve the nobles by providing them with military services and financial rewards, working on their domains, and handing over a portion of the land’s crops to the nobles. Thus, large tracts of land were kept as collectively managed commons, and the most powerful landowners were the churches that held them, dominating much of the thinking about money and economics.

The European Monetary System in the Middle Ages

The Roman Empire, was the first entity in history to fully integrate currency into the national fiscal system. Rome used its right to coin money to increase the sovereign coinage tax by means of Currency Debasement (Legal value — Intrinsic value = Seigniorage, where the nominal value of the currency minus the intrinsic metal value equals the coinage tax), while treating the given nominal value as constant, to bring the Roman The exploitation of the intrinsic metal value of the currency led naturally to an increase in the sovereign mint tax. The tragic end of the Roman currency is a reminder of the cost of sovereign credit: when the sovereign has the absolute power to devalue the currency, it cannot maintain its stable value.

After the Middle Ages, the melting and hoarding of precious metals became the religious symbols of the kingdoms, and the standing of the monarchy symbolized a limit to the power of the religious forces against the sovereign to abuse the power of coinage. The early Middle Ages saw a return to self-sufficiency and bartering in some regions, and only a few regions, such as Italy and the Iberian Peninsula, still maintained a relatively high liquidity of metal money trading. As a result, since the collapse of the Roman monetary system and until the eighth century, fractional currencies circulated unevenly throughout Europe, at which point no monetary system could be formed. However, the more valuable gold currencies issued by the Byzantine or Arab empires were still used for long-distance trade outside the region.

The monetary system used during the reign of Charlemagne, whose rules of measurement were followed until the 1970s. During the 8th century, Charlemagne, crowned by the Pope in the Western Roman Empire, re-established a uniform and complete monetary system (called “Denarius” or “Denier”), which became the “Denarius” from the 9th to the 13th centuries. major European currencies. The rules for its measurement continued to be followed until 1972 and became the rules of measurement for subsequent modern British currencies. The system delineated the value of a standard 1 pound as equal to 20 shillings (Sliver Shilling) and the value of each shilling as equal to 12 pence (Sliver Penny) (i.e., 1 pound is redeemed for 240 pence). At the same time, based on the market price of gold at 12 times the market price of silver, 12 pence is worth 1 soledus (an ancient Roman gold currency). Based on this, the monetary system (later known as the Carolingian Monetary System) flowed throughout Europe for hundreds of years, undergoing varying degrees of dilution of the metal’s composition from different monarchs.

Once some of the issuers, for profit-making or war-financing reasons, have privately extracted more minting tax; with a fixed exchange rate, and based on the asymmetric information of traders about the value of the coins, the inflation caused by the addition of bad money can spread across regional borders, gradually destroying the fairness and credit of the entire monetary system, resulting in a beggar-thy-neighbor effect, leading to the expulsion of good money by bad money, i.e., Gresham’s Law (Gresham’s Law). (Gresham’s law). In fact, a situation like this we can also see in the Holy Roman Empire, which is a little more recent in history: the Thirty Years’ War of Religion in Europe led to heavy losses for many of the vassals, and the powers that be used the same trick to hide the lost revenues, a selfish act that discredited the entire monetary system.

Business Lending from a Religious Perspective

Regarding the origins of interest-bearing loans, though we cannot trace them back through history to their earliest inventors. According to the literature of David Graeber’s early civilization, the Sumerians were already familiar with interest-bearing loans as well as compound interest loans. The Mesopotamian valley was rich in land, but lacked other basic resources such as stone, wood and metal. This problem prompted many monks to take out loans to become merchants, importing scarce commodities from abroad to earn money from local merchants, with the interest being a cut of the merchant’s profits for the bureaucratic monasteries responsible for debt management. Over time, more and more merchants came to the temples to ask for commercial loans. As a result, commercial loans spread throughout the Mesopotamian Valley.

Along with the widespread use of commercial loans came the rise of usury, which became a form of persecution by bureaucrats and wealthy merchants against peasants who had financial difficulties. When these farmers defaulted on their loans, bureaucrats and wealthy merchants were able to legally take over their property, usually escalating from grain, livestock, and furniture to land and houses. Some highly indebted people even had to sell their children and wives as slaves to pay off their debts. But the more property they were deprived of, the more difficult it was for them to be able to pay their debts, leading to the break-up of families and social strife. Thus, during the Sumerian period, the pernicious social phenomenon of interest-bearing loans itself was resisted by the later medieval churchmen, and the biblical text is straightforward in its attitude to it.

“If a poor man of my people dwells with thee, and thou lendest money unto him, thou shalt not take from him profit as a moneylender.”

Even other chapters in the Bible make it clear that the end for usurers is death and hellfire. And this has to do with the context of the Bible’s early writings, which were born just as the Roman Empire was in the throes of a deep debt crisis. At that time, many free peasants were saddled with unpayable debts, and they were pinning their hopes for life on the Christian spirit of charity, for Christianity clearly identified the plight of the indebted and the community of usurers behind the moral admonition. The Old Testament text, however, does not forbid interest-bearing loans altogether, but rather permits and supports the imposition of interest on the Gentiles, with meaningful results.

“Whatsoever thou lendest unto thy brethren, either in money, or in grain, whatsoever is profitable, it is not profitable. It is profitable to lend to the Gentiles, only it is not profitable to lend to your brother.”

However, to this layer of false benevolence, Graeber points out that charity is merely a way of maintaining rather than destroying the hierarchy, encouraging the peasants to exchange a small mercy to the poor for a large gift back from God, or to offset a greater debt to God, giving a new layer of hierarchical debt system (although ironically, the debt to the Lord is a voluntary one arising from a Christian spirit) (the Axial Age), rather than the unilateral violent rule of the Axial Age. Thus, in contrast to the Axial Age, which was ruled by violent aggression and slavery, in post-medieval Europe the hierarchy was not altered by the prevalence of Christianity, so that the collective cry against usury became an important mass force in the later European Reformation.

“Collective ownership” of groups under the Crusades

Since the splitting of the Roman Empire into the Eastern and Western Roman Empires, the Western Roman Empire was continually invaded by the Germanic peoples of the north, and eventually opened the door to the medieval era with its demise. At the time of the fall of the Western Roman Empire, the Eastern Roman Empire with Constantinople as its capital was still standing, and became the Byzantine Empire, the only remaining orthodox Roman Papal State. On the other hand, the Germanic peoples, who occupied the territory of the original empire, continued the Roman law and Christianized it, and also established a feudal rule based on Catholicism, forming the Frankish kingdom, which was the mainstay of Central Europe. In order to consolidate the legitimacy of his Catholic rule, the Frankish Emperor Charlemagne was crowned Pope by Pope Benedict III in 800, nominally becoming the “Pope of the Romans” and symbolizing the revival of Roman culture.

The Crusades, the Byzantine Empire in the south, were threatened by the expansion of the predominantly Islamic Arab empire, and its Christian holy sites, “Jerusalem”, were occupied by these “pagans”. The Catholic European powers decided to form a united army and move south in order to recapture this holy place in the name of God and drive the infidels from their homes.

During the Wars of Religion, which lasted nearly 200 years, nearly ten military expeditions were led and financed by the nobility of different vassals. With the Pope’s support, anyone could mortgage assets in a castle and apply for an interest or no-interest loan from the Knights Templar to obtain a “bill of exchange”, a personal credit that helped the Crusaders pay for their expenses along the way to the end of the war. Jerusalem was finally liquidated. Secondly, the issuance of atonement scrolls further encouraged the faithful to participate in this crusade, with Pope Urban II, the initiator of the First Crusade, decreeing that those who participated in the crusade for the defense of the Church of Jerusalem (and not for their own glory) would be able to offset all penalties (provisional punishments) for their sins. Also, the nobles of the vassals were able to obtain a military loan from the Pope by leasing the use of their lands, mortgaging their feudal lands, or by taking a quarterly share of their feudal estates. In 1188, Philip II (Philippe Auguste), King of France, issued a decree declaring that the private loans of the crusaders were subject to the royal authority, i.e. to the royal credit guarantee; and later, Pope Innocent III did not only authorize the crusaders to defer repayment of their loans, but also to make them repayable by the Pope. The power of the term also forgives the compound interest on that portion of the loan deferment. Based on a sense of religious duty, family and friends were obligated to sponsor the cost of the Crusades. Henry II and Henry III, kings of England, were generous patrons of the Crusaders, including valuable jewels and well-equipped knights.

So, although each crusader had his own number of loans to be repaid and their own duration, they acted as a collection, led by feudal landlords, public officials and ecclesiastical communities. When valuable metals were seized, they chose to melt them down and share the loot, helping each other, and are considered to be the earliest “collective ownership” groups in history. Interestingly, the invention of the limited partnership took place in Venice at the same time, but benefited from the rise of long-distance trade.

Graeber has pointed out that when the earliest currencies were created, among their important social functions were: gifts/collectibles (moving through the population as gifts; not sold as commodities), and such social acts of courtesy in the community symbolized the symbolic honor and dignity, or debt, that moved through the group. Such seemingly altruistic behavior is a form of over-honorable personal dignity, a self-interested act of building public reputation in the group. Thus, as the author of The Selfish Gene says, “Money is a formal symbol of deferred reciprocal altruism,” which is meant to be “good to you today, to be returned to you tomorrow. So, from this monetary perspective, it is easy to understand what happened in the Middle Ages when we approach the Crusades.

For reasons of public honor and the call of the Pope, the Knights Templar were forced to make unprofitable loans, often resulting in debts to kings or the seizure of vast tracts of land because the loans were uncollectible. As a result, the Knights Templar lasted only 1307 years, from 1118, and eventually fell into the same fate as many small medieval trading communities. Among other things, King Philip IV, who was in financial crisis, owed the Order a great deal of money, and the king, unable to pay his debts, chose to attack the Order, arresting and murdering its leaders and bands, and confiscating their wealth. The problems of the Knights Templar stemmed largely from the lack of a strong intermediary, where the king could choose to default and use his power to execute his creditors, which came from a royal judgment.

Graeber points out that Italian banks, such as Bardi, Peruzzi and Medici, did much better than the Templars. The Venetians, who benefited from their excellent location, not only created the *colleganza*, or limited liability partnership, but also gave birth to an innovative legal and electoral system. This lucrative long-distance trade fostered a group of extremely wealthy Venetian merchants who, for their families, controlled the overall political functioning of the Venetian Republic by creating a parliament and creating a large financial derivatives market based on an innovative legal system.

Financial innovation under the Republic of Venice

Many people wonder how “bill of exchange” actually works. In fact, the medieval bill of exchange system was the most widespread commodity trade financing tool of the time, and the system was simple: the bill of exchange transaction could be completed through a bank intermediary. Before the 13th century, Venetian merchants controlled the maritime trade routes connecting Europe with the eastern Mediterranean coast (Levant), and linked the bill of exchange transactions through bank intermediaries: the exporter of country A (Export/Drawer) sold a bill of exchange containing a personal signature to the bank of country A (Bank/Remitter), while the bank provided a cash to carry out the transaction. Upon receipt of the money, the exporter in country A begins to deliver the goods to the information provided by the bank, while the bank in country A assigns a designated person (Correspondent/Payee) at its branch in country B to write an IOU on the account of the importer (Importer/Payer) in country B for a limited period of time and, at the end of the period, to recover a fee from the importer to balance the books.

At this time, credit-based forms of trading freed merchants from having to carry large quantities of minted coins for international trade, as minted coins carried along the way also had the disadvantage of being stolen and expensive to exchange. The new form of transaction also benefited from the invention of double-entry bookkeeping, which boosted the amount of credit money, expanded private credit in the Middle Ages, made banks intermediaries in money creation, and marked the rise of early banking. Double-entry bookkeeping was developed in Italy and laid the first foundation for the prosperous financial industry there. At that time, double-entry bookkeeping had been born one or two hundred years, so called double-entry bookkeeping because each transaction is accounted for in two different accounts, one side is liabilities (Asset), one side is assets (Liability), and this formed a “my assets are your liabilities” reciprocal relationship, and at the same time, each person’s assets are your liabilities. The sum of the assets and liabilities is the balance of the account; therefore, double-entry bookkeeping is not only easy to keep and check, but it brings credit to pass with pen and paper out of thin air… it’s amazing! Its magical form later became the form of bookkeeping throughout the modern central banking system.

“The modern banking system creates money out of nothing. This process is perhaps the most horrifying sleight of hand ever invented. Inequality and evil have bred and given birth to banking. Bankers own the land; take it from them, but give them the power to create credit, then with a large stroke of the pen they can create enough money to buy the land back again …… If you wish to remain a slave to the bankers and pay the costs of enslaving yourself, then let them continue to create deposits. “
Josiah Charles Stamp, Head of the Bank of England

The process of creation of money brings infinite surprises. This “creation of money out of nothing” is the process of creating the simplest form of credit money, which consists of a web of credit woven from IOUs.

In 1202, the financial innovation of the Middle Ages came from the famous Italian mathematician Leonardo Fibonacci’s Liber Abaci (Book of Calculations), which gave financiers a basic set of mathematical tools to calculate the present value of future cash flows, the relative prices of commodities, interest income and the share of proceeds. At the time, Europe was still using the Roman numerical system and negative numbers did not exist, but Fibonacci brought the Arab numerical system and the Indian concept of negative numbers to Europe and expanded it, applying present value analysis to the liquidity management of bankers in a similar way to the modern day.

With these theoretical foundations in place, the Venetians put these experiences into a book at the School of Commerce, which in turn trained more people to run banks and trade, created the world’s first limited partnership system, as well as the bankruptcy law to identify insolvent companies, and revitalized the trading network of city-state republics around the Mediterranean.



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