Renaissance to Enlightenment
Most of Europe was a collection feudal agrarian societies before the Renaissance. Serfs paid rent to a lord for the use of land. That lord paid rent to a higher lord who in turn paid rent to a King. Lack of clear title for land ownership made exchanges in real estate very difficult. Furthermore, tenants were unlikely to make more than minimal improvements to property because their hold on property was so tenuous. It was enough just to survive.
This “rent seeking” practice was ingrained in most of the monarchies of continental Europe. As the economies grew, rent seeking expanded into every aspect of life. Permission was needed from the government to engage in most economic activities. Permission was granted upon payment fees to government officials. The King’s nobles, exempt from taxes themselves (along with clergy), were the ones who collected the fees. By paying a large fee to the King, one could purchase a position of nobility. In return, the King would grant the noble a monopoly on collecting certain fees in certain areas. These nobles might in turn sell rent collecting positions to others under them.
The result of this behavior was to create a highly corrupt government system that was utterly indifferent to economic productivity. It created an economy where prosperity was achieved by securing government favor and living a life of leisure off of the revenue exacted from productive workers. In France, this rent-seeking system eventually forced farmers to sell their lands and become indentured servants to the nobility. It also brought on the French Revolution at the end of the eighteenth century.
However, not all of Europe was dominated by despotic monarchies. The city states of Northern Italy were an important exception; Venice in particular. Venice’s inhabitants were the descendants of wealthy refugees who fled from the mainland of Italy when the Lombards attacked in the years following the collapse of the Roman Empire. Its geography made it an excellent defensive position as well as an ideal location for shipping traffic. Initially Venice aligned itself with the Byzantine Empire and its leading residents were considered nobility. However, they were nobiles without landed estates and they were located at the far edge of the empire. From the start, their economy was tied to trade between the East and Europe.
The absence of dominant feudal systems and the focus on trade made cities like Venice, Florence, Pisa, Genoa and Milan the most economically innovative centers in Europe. By the thirteenth century these cities produced banking families that had outlets as far away as present day Germany, England and Portugal. They used and perfected the letters of credit method used by the Templar Knights and the monasteries. (In fact, the Knights may have learned their financing techniques from the city states.) The abacus, Arabic numerals and the concept of zero were made widely accessible in Europe in 1202. Schools sprang up to teach these skills and concepts in Northern Italy. Double entry bookkeeping was invented. By the fourteenth century these firms had created corporations complete with by-laws, corporate seals, charts of accounts and in some cases the concept of share ownership in the corporation. Family companies like Riccardi, Medici and Peruzzi dominated lending and finance all across Europe by the fifteenth century.
It is important to note that these were indeed family businesses. During the Roman Empire, business failure and loan defaults could result in the complete confiscation of property and servitude for the defaulting party. This tradition carried over into Europe including the Italian city states. For this reason, all branches across Europe were run by family members partly because no family member would exact such draconian penalties on other family members. It was also for this reason that almost all commerce conducted up to this time, and for a few more centuries beyond, used debt financing. Partnership or share ownership with others meant that if the business went under, everyone connected stood to loose everything they had including their freedom. Lending meant only the capital lent was at risk.
The Northern Italian model of city state commerce quickly spread north to cities that had escaped dominance by the rising nation-states of continental Europe. Other cities and regions managed to gain some autonomy but the rural areas of continental Europe remained trapped in feudalistic relationships. The Northern Italian cities quickly declined as Spain expanded its despotic control over the area in the early decades of the sixteenth century. The center of commerce shifted to the great cities of present day Netherlands and England.
The story of Dutch commerce is of great importance to economic history. It played out primarily in the sixteenth through eighteenth century when France brought about its demise. For our purposes here, we will simply note the Dutch, along with Spain, France and England began the world colonization process that eventually created the global economy (although initially with a highly destructive mercantilist mentality.) This expansion of trade and commerce led to continual refinements in market practices both at home and internationally. The Dutch were leaders in the development of joint-stock companies, the forerunner of the modern corporation. We have more to say about this in the next post. The next major leap forward in capital markets would come from England and from the United Sates during the Eighteenth Century to the present.
