Money in Medieval Europe
With the fall of the Roman Empire, Europe emerged into the Dark Ages with dozens (if not hundreds) of nations, each trying to rise to power. Soon Europe was flooded with merchants travelling between cities to provide commodities from across Medieval Europe and the whole of the known world. With dozens of different currencies, not to mention highwaymen lurking in every corner, the invention of a medieval banking system was more of a necessity than a luxury. Money changers took to the merchant streets, and soon banker families ensured that money stayed safe and sound in well-guarded strong boxes. By the 13th century, money was “created out of thin air”, and interest on loans and exchanges began to give rise to early capitalism.
As you might guess, knowing how to convert from one currency to another was a fairly technical business. That business was handled by a medieval money changer. In Florence and other northern Italian towns, the money changers set up shop at markets and near merchant establishments, sitting on benches that (in Italian) were called banca. That’s where we get the term bank.
Money changers 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 strong boxes and the ability to keep good records, so they became holders of deposits. A visiting merchant would rather leave his cash with a money changer than keep it in a bag under his bed at the inn!
As with modern currency conversion, money changers charged a percentage of the transaction for their services. It was normally quite modest, only one or two percent, but it was enough to make a nice living. Even after the development of medieval banking, money changers continued to play a role, though they tended to deal mainly with regional commerce and lent money in small sums.
The history of banking begins in the Classical world as early as 4000 BC in the Mesopotamian city states. Primary sources discuss the use of city temples as places where people could deposit gold, paying 1/16th of its value as fees. Similarly, agricultural lending allowed farmers to borrow seed-grain and repay with interest during harvest. The first appearance of money lending and money changing happened in Greece during the 3rd century BCE, where merchants from each city state would store coinage.
Since a money changer did most of the things associated with medieval banking, it’s impossible to say exactly when or where “banking” started as an institution. It was certainly in the thirteenth century, and most probably along the northern shores of the Mediterranean, particularly in Italy and Catalonia. Assertions that medieval banking started in Genoa or Barcelona refer specifically to formal institutions with a name and a charter. Banking families were doing business all through the 1300s.
However, there is no clear transition between between money lenders and formalised bankers. Merchant families who had bases in several cities had systems in place for documenting and safeguarding their wealth in these different centres of business. The principal function was originally to serve the family business, but this often entailed providing financial services to partners and clients. Gradually, these families opened up this service to the public, and monetised it to grow even wealthier.
We think of a bank as a building with money in it – and there were a few such places, at least by the 15th century. Mostly, though, buildings were 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 rooms for storing valuables, perhaps even 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 medieval banks. The few that did exist were operated by the city, such as the Bank of St George in Genoa.
The other really noticeable difference is that while Medieval banks stored 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.
Medieval banking as an engine for war
In the 12th century, the need to transfer large sums of money to finance the Crusades stimulated the re-emergence of banking in western Europe. In 1162, Henry II of England levied a tax to support the crusades—the first of a series of taxes levied by Henry over the years with the same objective. The Templars and Hospitalliers acted as Henry’s bankers in the Holy Land. The Templars had acquired holdings across Europe between 1100–1300. Because they were a pan-European organisation, they could accept currency at one castle, and offer the customer a ‘demand note’. This ‘demand note’ was then redeemable for the specified sum of money at another castle. This system allowed travellers, and specifically crusaders, to travel without the risk of robbery.
Based on a combination of donations and business dealings, the Templars established financial networks across the whole of Christendom. They acquired large tracts of land, both in Europe and the Middle East; bought and managed farms and vineyards; built massive stone cathedrals and castles; got themselves involved in manufacturing, import and export; had their own fleet of ships; and at one point they even owned the entire island of Cyprus. The Order of the Knights Templar arguably qualifies as the world’s first multinational corporation.
Ironically, banking was also the undoing of the Templars: by 1312, the French monarchy and aristocracy owed the order vast amounts of money due to the war with the English. On a fateful Friday the 13th morning, King Philip IV ordered that de Molay, the Grand Master of the Templars, as well as scores of other French Templars, were to be simultaneously arrested. The arrest warrant started with the phrase: “Dieu n’est pas content, nous avons des ennemis de la foi dans le Royaume” [“God is not pleased. We have enemies of the faith in the kingdom”]. Claims were made that during Templar admissions ceremonies, recruits were forced to spit on the Cross, deny Christ, and engage in indecent kissing; brethren were also accused of worshipping idols, and the order was said to have encouraged homosexual practices. The Templars were charged with numerous other offences such as financial corruption, fraud, and secrecy. Many of the accused confessed to these charges under torture, and these confessions, even though obtained under duress, caused a scandal in Paris.
The Dying words of Grand Master Jacques de Molay,
“Dieu sait qui a tort et a péché. Il va bientot arriver malheur à ceux qui nous ont condamnés à mort” (free translation : “God knows who is wrong and has sinned. Soon a calamity will occur to those who have condemned us to death”).
Pope Clement died only a month later, and King Philip died in a hunting accident before the end of the year.
A Bill of Exchange
One of the most important functions of medieval banking 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 jewellery 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 tend 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 partner or informant in Bruges keeping him informed, as the Brugeois had their Florentine informants and partners. 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 the medieval banks in Bruges and in Florence. The device that made this possible was called a bill of exchange.
Essentially, a bill of exchange is an IOU – it is a document guaranteeing payment of anything from money to items. Some prototypes were used by the Iberian and Italian merchants in the 12th century, but they really started to develop into common use in Europe during the 13th century. The first mention of the use of bills of exchange in England dates from 1381, under the reign of Richard II; bills of exchange were mandated for use in England, and the future export of gold and silver coins, in any form, to settle foreign commercial transactions was forbidden.
Religion and Interest
“O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful” (3:130) “and Allah has permitted trade and has forbidden interest” (2:275).
Usury is, as defined today, the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors. Historically in Christian societies, and still in many Islamic societies today, charging any interest at all can be considered usury. Someone who practices usury can be called a usurer, though a more modern term is “loan shark”.
The main forces preventing usurers from charging extortionate rates were the prevailing religions of the known world. Judaism (Deuteronomous), Christianity (Matthew, Luke) and Islam (Torah) all had very specific religious laws regarding interest. In short, all religions tried to ban people from charging interest in order to protect the masses from loan sharks.
The rise of Protestantism in the 16th century weakened Rome’s influence, and its dictates against usury became irrelevant in some areas. That freed up the development of medieval banking in Northern Europe. In the Arab world, where religion remained a very strong influence on the business world, bankers had to become more ingenious in the ways they generated profit. This included the transformation of interest into smart fees and the invention of leasing, which revolutionised Islamic medieval banking, and was later adopted in European medieval banking.
- ‘In Restraint of Usury: the Lending of Money at Interest’, Sir Harry Page, The Chartered Institute of Public Finance and Accounts, London, 1985
- Wikipedia, History of Banking https://en.wikipedia.org/wiki/History_of_banking
- Currency & Banking Lecture notes, Dr. E.L. Skip Knox, Boise State University https://europeanhistory.boisestate.edu/latemiddleages/econ/banking.shtml