The term “capital” first came into use in the fourteenth century to identify funds that have the capacity to return income, rather than simply being of consumable value. Thus, in early usage, “capitalism” referred to the use of wealth (or money) to earn wealth (or money). Put another way, the word “capitalism” implied using wealth to provide income with the intention that the initial value of the wealth would not be reduced, as with money lent at interest. It is investment, the systematic risking of wealth in pursuit of gain, that distinguishes the capitalist from those who merely exact their wealth through rents, taxes, conquests, or banditry. (1)
The fathers of the early church shared the Greco-Roman world’s general disdain for business and trade. This began to change by the fifth century. Augustine maintained that the price of a good was not simply determined by the seller’s costs but by the buyer’s desire for the product. This was an important step toward thinking in terms of supply and demand.
Not long after the collapse of the oppressive Roman Empire, innovations began to occur. Farmers discovered a three crop rotation system that proved far more productive than the universally practiced two crop rotation system of the Romans. It created more fertile soil and generated greater production. Monasteries owned vast amounts of land and put the new practices to work. These new practices increased production and, in combination with frugal lifestyles, led to the creation of considerable wealth for the monasteries. Other innovations like the invention of the horse harness around 1000 CE also contributed to production. Monasteries often took their resources and invested them in more land, further increasing their wealth.
The increased prosperity brought people to the monasteries seeking trade. Eventually, at least one day a week was set aside for a market fair. People gathered at monasteries to barter and trade. At first they traded primarily with the monastery, but later between each other as well. People began to permanently settle around the monasteries. Many of these monasteries grew into present day European cities.
Eventually the monasteries began to specialize in one type of product (cattle, grain, wine, etc.) and then trade with each other for their other needs. This specialization led to further improvements in productivity and quality, but it also made trade considerably more complex. In response, they moved away from a barter economy and began to introduce a cash economy. Money was used for exchange instead of direct bartering.
The monasteries were by far the wealthiest institutions in Europe. They began hiring laborers to do the work at the monasteries, freeing them to engage in a much wider variety of scholarship and religious activities (like selling indulgences.) Since advancement in the monasteries was based on merit instead of feudal caste considerations, it insured that only the most effective managers rose to the top. When lords and rulers needed to borrow, the Church was the only lender of consequence. The monasteries became the proto-capitalist multi-national corporation.
Meanwhile, as the crusades developed in the early part of the second millennium, a great many Europeans began making pilgrimages to the Holy Land. This was an exceedingly dangerous and expensive undertaking. Carrying large amounts of wealth made one a target for bandits. The Knights Templar emerged to protect people who took these pilgrimages. Soon they developed their own economic structures. The knights would sell a chit (a tally sheet) to the pilgrim. The pilgrim would stay at way stations provided by the knights along their journey. They could purchase goods in the Holy Lands from merchants approved by the knights. At each stop, charges would be added to the chit using encrypted code. When the pilgrim returned, the chit was remitted to the issuing knights and the pilgrim either received back what had not been spent or was issued a bill for what had been spent in excess. Meanwhile the Knights settled the bills between themselves.
It wasn’t long before the Knights also realized they could prosper by making similar arrangements with merchants traveling not only to the Holy Land, but on other trade routes through Europe as well. Usury was prohibited by the Church so the knights opted to “rent” the chits out to pilgrims and merchants, collecting at the end of the pilgrims journey. This careful use of semantics kept them from running afoul of the Church.
The Knights Templar began to experience reversals in their military endeavors by the thirteenth century. Their military prowess had waned considerably by the beginning of the fourteenth century but they still controlled a vast amount of real estate and wealth. Meanwhile, European aristocracies were growing in power. When the Knights Templar and King Philip IV of France came into conflict of over a loan the King had received, King Philip persuaded the Pope to bring a variety of charges against the Knights. Some members were arrested in 1307. Some were tortured and eventually executed. Exactly what became of the Knights and their holdings is not accounted for in the historical record, making them a frequent subject for conspiracy theorists and story tellers.
The Knights may have vanished but the knowledge and systems of commerce survived them. As Europe entered the Renaissance, the growth of capitalism emerged from another sector.
(1) Rodney Stark, The Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success, New York: Random House, 2005. 55-56.