The Mother of Invention:

Financial Goods and Services in the Medieval Period

1000 1500 CE


Michael Scott










Scott 2

INTRODUCTION
The collapse of the Roman Empire in the fifth century brought an end to the established
financial institutions. Europe descended into a period of relative chaos,
1
characterized by a
scarcity of written records. The period, known as the Dark Ages, were likely not as grim as
previously believed. In fact, Western Europe in this period was home to fairly rich material
cultures which appear to have maintained extensive trade networks.
2
However, this period left
few financial institutions on which the modern world could be built.
In contrast, the high and late medieval period was characterized by several significant
developments which have had a major impact on the modern world. The social context of the
medieval period
3
played a crucial role in these developments. The Catholic Church was at the
height of its power during this period, challenged only by the Holy Roman Empire. The church
was able to exert considerable influence, therefore, on the economies of the various realms of
Western Europe. European society was primarily agrarian and organized around the feudal
system. Meanwhile, the merchants who inhabited the towns and cities were becoming wealthier
and more powerful, particularly in the city-states of Italy. In this environment, the marketplace
was dominated by reciprocity and redistribution,
4
as the power of personal relationships, king
and church dictated many of the economic decisions taken.
In this context, the medieval economy developed, thereby building the foundation for the
modern world. The Catholic Churchs prohibition on the practice of usury gave impetus to the

1
Robert S. Lopez, The Dawn of Medieval Banking, in The Dawn of Modern Banking, ed. Fredi Chiappelli (New
Haven: Yale University Press, 1979), 3.
2
See Peter S. Wells, Barbarians to Angels: The Dark Ages Reconsidered, (New York: W.W. Norton & Company
Inc., 2008).
3
The phrase medieval period will be primarily used in this essay to refer to the period from 1000-1500 CE. In
cases where the period from 500-1000 CE is addressed, the phrases early medieval period, or dark ages will be
used.
4
For a discussion of redistribution and reciprocity see Karl Polanyi, The Great Transformation.
Scott 3

development of a number of financial services to ensure the necessary supply of credit.
Furthermore, this ban had a major impact on European society and in particular the treatment of
the Jewish minority. The kings of Europe were able to finance their wars through public debt and
either outright default or the debasement of the currency. In addition, the challenges of a
precious metal coinage resulted in the development of a system of deposit and transfer banking
which formed the basis for the modern banking system. Also, the perils of trade in this period
resulted in the development of new risk sharing contracts and an early insurance system. Finally,
the spread of knowledge from the Muslim world allowed for significant development in
European mathematics and finance. In sum, the medieval period was characterized by a number
of financial innovations and institutions which lay the foundation for the development of modern
financial system.
USURY
During the medieval period, a great deal of financial innovation and development was the
result of limitations on the practice of usury. This issue also had enormous implications on
interfaith relations as the different religions of Western Europe maintained divergent positions
with regards to the charging of interest. The key prohibition of usury, the lending of money with
interest, came from the Book of Deuteronomy which stated, Non fnerabis fratri tuo ad usuram
pecuniam, nec fruges, nec quamlibet aliam rem: sed alieno. Fratri autem tuo absque usura id
quo indiget, commodabis: ut benedicat tibi Dominus Deus tuus in omni opere tuo in terra, ad
quam ingredieris possidendam.
5
Roughly translated, this passage prohibits the practice of usury

5
St. Jerome, Deuteronomium (Deuteronomy) 23:19-20, Vulgate Bible. The Vulgate was a translation of the Bible
into Latin by St. Jerome commissioned by Pope Damasus I and completed in the period 390-410 CE. It was the
predominant translation in the catholic world during the medieval period and given official status in the Catholic
Church at the Council of Trent. (see Gloria Sigman, The Word of God in Pictures, History Today, (July 1999), 18-
25. & Michael Walsh, ed., St Jerome, Butlers Lives of the Saints: Concise Edition Revised and Updated,
Scott 4

in the lending of money or goods to ones brother but not to a stranger. This distinction was the
basis for the different approaches taken to the issue of usury by the Jewish and Catholic faiths.
JEWISH CREDIT AND EXPLOITATION
For the Jewish people, the prohibition was taken to be limited to their co-religionists. A
clear distinction in this time period was drawn in Jewish ethics between the brother (ah) and the
foreigner (nokri). The nokri was excluded from the protection against usury which was afforded
to members of the mishpaha (clan).
6
Thus, Jewish entrepreneurs were able to charge interest for
the loans they made to individuals who were not members of the Jewish community.
Not only was the Jewish population able to engage in money-lending with the Christian
majority without any ethical constraints, several aspects of their position in European society
made such a venture more attractive. Jews faced widespread discrimination in Western European
society during the medieval period. This discrimination was manifested in a variety of different
ways, including limitations on property rights and economic activity. Jews were commonly
prohibited from practicing certain occupations and restricted in the types of property they could
own or rent.
7
For example, under English common law, a Jewish individual was only allowed to

(Westminster: Burns and Oates, 1991), 307-310. & Stephen Bertman, The Anti-Semitic Origin of Michelangelos
Horned Moses, Shofar: An Interdisciplinary Journal of Jewish Studies, volume 27, number 4, (summer 2009), 95-
106.). All Biblical quotations used in this essay will be from the Vulgate as this was the primary version in use by
the Catholics of the medieval period. An English interpretation will also be included. A translation of the passage is:
Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon
usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury, that the
Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
Translation from Benjamin Nelson, The Idea of Usury: From Tribal Brotherhood to Universal Otherhood Second
Edition, (Chicago: University of Chicago Press, 1969), xx-xxi. Prohibitions against usury are also contained in
Exodus and Leviticus.
6
Nelson, xix-xx.
7
Reva Berman Brown & Sean McCartney, The Internal Exile of Medieval English Jewry, The Medieval History
Journal, volume 6, issue 1 (2003), 57. Daniel M. Friedenberg, The Jew as Chattel in Medieval Europe, Judaism,
volume 53, (Winter 2004), 21-26.
Scott 5

hold rented land.
8
Such restrictions constrained the actions of the Jewish population. Essentially
excluded from participation in the agricultural sector which dominated medieval society, a
segment of the Jewish community sustained themselves by offering credit to the Christian
population.
In fact, because of their usefulness as financiers, the Jewish population was exploited by
many Western European regimes. The Jewish communities of several kingdoms were the legal
property of the respective monarchs. In Aragon, the fueros (charter) of Teruel made the Jews
servi regis, and incorporated them into the royal fisc. Thus the king had the right to levy special
taxes on his Jewish population. The fueros of Cuenca accomplished the same end in Castille.
9
In
England, William I
10
encouraged the relocation of Jews from Rouen in the Duchy of Normandy
to England to spur economic development in his new kingdom.
11
The Exchequer of the Jews was
eventually established to administer the Jewish community. It administered a system of
chirograph chests which recorded loans made by Jewish money-lenders.
12
In 1233, a statute
expelled all Jews who were not benefiting the English crown from the realm.
13
Furthermore, the
Exchequer of the Jews had begun to control where Englands Jewish population could live by the
mid-1260s. The 1275 Statute of Jewry (Statutum de judeismo) further demonstrated the sole
reason for the interest of Englands monarch in his Jewish community was money-lending. It

8
Brown & McCartney, 57.
9
Maya Soifer, Beyond convivencia: critical reflections on the historiography of interfaith relations in Christian
Spain, Journal of Medieval Iberian Studies, volume 1, issue 1, (2009), 25-26.
10
Given the epithet The Conqueror, William, Duke of Normandy, invaded England in 1066 following the death of
Edward the Confessor, and defeated Harold II at the Battle of Hastings. This is known as the Norman Conquest.
11
Richard Huscroft, Expulsion: Englands Jewish Solution, (Stroud, Gloucestershire: Tempus Publishing Limited,
2006), 25.
12
Paul Brand, The Jewish Community of England in the Records of English Royal Government, in The Jews in
Medieval Britain: Historical, Literary and Archaeological Perspectives, ed. Patricia Skinner, (Woodbridge, Suffolk:
The Boydell Press, 2003), 73-74.
13
Brown & McCartney, 56.
Scott 6

forbade Jewish habitation in any town without a chirograph chest.
14
The 1275 Statute also
recorded a chevage (head tax) on the Jewish residents of England. Furthermore, the English king
claimed entitlement to a portion of the estate upon the death of a Jewish individual.
15
Similarly
exploitive measures were in place elsewhere in Western Europe including in France and
Germany.
16

The relationship in medieval society between the Jewish community, particularly Jewish
money-lenders, and the Christian majority was complex. Throughout the period of Jewish
residency in England, the community enjoyed and was, at times, reliant upon the protection of
the English monarchy. This gave the monarch the ability to intercede to enforce or relax loans
made by Jewish money-lenders. For example, Henry I compelled Ranulf, Earl of Chester, to pay
his debts to a group of Jewish creditors. In this way the Jewish population was used as a source
of English royal patronage.
17
The 1253 Statute of Jewry, enacted during the reign of Henry III,
made explicit this relationship between the English Jewish community and the monarchy:
All Jews, wheresoever they may be in the realm, are of right under the tutelage
and protection of the King; nor is it lawful for any of them to subject himself to
any wealthy person without the Kings licence. Jews and all their effects are the
Kings property, and if any one withhold their money from them, let the king
recover it as his own.
18

Thus, the English monarch asserted his claim to the property of the Jewish community of
England. Thus, while the Jewish community was not forced to live in a ghetto, their dealings
were tightly controlled to promote the interests of the crown. Interfaith relations were also quite
complicated in other Western European kingdoms.

14
Brand, 73-74.
15
Ibid.
16
Soifer, 26.
17
Huscroft, 26-27.
18
Brown & McCartney, 56-57.
Scott 7

Another example of the complexity of these relations in medieval Europe was the trial of
Bondavid Draguignan in fourteenth century Marseilles. In 1317, Draguignan, a Jewish money-
lender, was accused of being a false creditor by a Christian debtor. During the trial, twenty-four
Christians, including members of the nobility, testified to the good character of Draguignan.
19

This case demonstrates the potential for extremely positive relations between debtors and
creditors in the medieval world. In fact, Jewish creditors even gave special terms to loyal
customers who were known as maarufiya.
20
This special relationship between a Jewish lender
and some of his debtors highlighted the reciprocal nature of the medieval credit system. In 1318,
however, church pressure caused a more stringent definition of usury to be enacted in
Marseilles.
21
Furthermore, by the late medieval period, interfaith relations in much of Western
Europe had continued to deteriorate.
Discrimination against the Jewish minority was present throughout medieval society. In
the period from 1007-1012, several governments tried to forcibly convert their Jewish
populations and there were massacres of Jews throughout Europe.
22
With the passing of the
millennial anniversaries of the birth and death of Jesus Christ, interfaith relations improved.
However, anti-Semitism remained a significant force in medieval society. For example, the
blood libel emerged in Norwich in 1144.
23
By the late thirteenth century, attitudes on the
continent had hardened towards the Jewish minority. In 1278, Pope Nicholas III issued the papal
bull, Vineam sorec, which sought to encourage missionary work to convert the Jews. In response,

19
Judith R. Baskin, a review of Shylock Reconsidered: Jews, Moneylending and Medieval Society, by Joseph
Shatzmiller, Association for Jewish Studies Review, volume 16, (1991), 231-233.
20
Ibid.
21
Ibid.
22
Huscroft, 21-22.
23
Brown & McCartney, 59-60.
Scott 8

in 1280, Edward I of England ordered the Jewish population to attend Dominican sermons.
24
By
this time, the English Jewish community had declined considerably in both population and
wealth.
25
In 1290, Edward I expelled the Jews from England. This policy improved the kings
finances, as, in response to the expulsion, both parliament and the clergy granted Edward I an
additional tax.
26
Phillip the Fair expelled Frances Jewish population in 1306.
27
Most of the other
regimes
28
in Western Europe followed suit and expelled their own Jewish populations in the late
medieval and early modern period.
Another mark of the prejudice against the European Jewish population was the popular
conceptions about its economic activities. The image of the Jewish money-lender, exemplified
by Shylock, as an avaricious and merciless creditor,
29
was firmly entrenched in the European
mind.
30
In fact, the role of the Jewish community in money-lending had often been overstated,
both in the medieval period and by those studying it. In fact, Jewish money-lenders provided a
minority of the loans made in this period.
31
The exaggeration of the significance of Jewish
creditors was used to obscure the importance of Christian financiers. As shall be shown, the
medieval church did not support the practice of realizing gains from loans.



24
Huscroft, 138. Alexandra Guerson, Seeking Remission: Jewish Conversion in the Crown of Aragon, c. 1378-
1391, Jewish History, volume 24, issue 1 (March 2010), 51.
25
Huscroft 138-140.
26
Ibid, 151-152.
27
Karen Barkey & Ira Katznelson, States, regimes and decisions: why Jews were expelled from Medieval England
and France, Theory and Society, volume 40 (2011), 475-476.
28
See for example the description in Niall Ferguson, The Ascent of Money: A Financial History of the World, (New
York: Penguin Group, 2008), 37-38.
29
Baskin, 232.
30
Ibid.
31
Gregory B. Milton, Christian and Jewish Lenders: Religious Identity and the Extension of Credit, Viator
(Berkeley), volume 37, issue 1 (2006), 308. Baskin, 231-233.
Scott 9

CHRISTIAN CREDIT AND FINANCIAL INNOVATION
The universalism of medieval Christian ethics extended the prohibition against usury
outlined in Deuteronomy. The conception of a universal Christian brotherhood meant that usury
was forbidden by the church in all cases.
32
This ban on usury was strengthened by the New
Testament where, in the Gospel according to Luke, Christians were instructed that:
Et si mutuum dederitis his a quibus speratis recipere, qu gratia est vobis? nam
et peccatores peccatoribus fnerantur, ut recipiant qualia. Verumtamen diligite
inimicos vestros : benefacite, et mutuum date, nihil inde sperantes : et erit merces
vestra multa, et eritis filii Altissimi, quia ipse benignus est super ingratos et
malos.
33

This passage exhorted followers to love your enemies, do good and lend, hoping for nothing,
thus implying that usury was unacceptable. The Third Lateran Council of 1179 codified this
principle by excommunicating usurers. The Council of Vienna of 1311-12 went further still,
condemning as heretical the mere argument that usury was not a sin.
34
However, most of the
attention the medieval Catholic Church devoted to usury concerned the charging of excessive
interest.
35
Canon law in this period, however, was quite clear on its ban on charging of interest.
In spite of the Christian church prohibition, credit was essential to the functioning of the
medieval European economy, thus Jewish money-lenders served an important purpose and many
Christians entered into the lending business. In fact, it was Christians and not Jews that
predominated in the credit industry.
36
For example, in almost 70% of the transactions in a sample

32
Nelson, xxi-xxii.
33
Evangelium secundum Lucam (Gospel according to Luke), 6:34-35, Vulgate Bible. A full translation is: And if
you lend to them of whom ye hope to receive, what thank have ye? For even sinners lend to sinners, to receive as
much. But love your enemies: do good, and lend, hoping for nothing: and your reward will be great, and you will be
sons of the Highest, for he is kind unto the unthankful and the evil.
34
Ferguson, 36.
35
Milton, 309-310.
36
Milton, 308. Baskin, 231-233.
Scott 10

taken from the Spanish town of Santa Coloma, the creditors were Christian.
37
Some form of
compensation was necessary for, as Shylock reminded Bassanio in Shakespeares The Merchant
of Venice, But ships are but boards, sailors but men: there be land-rats and water-rats, water-
thieves and land-thieves, I mean pirates, and then there is the peril of waters, winds and rocks.
38

That is to say there were risks involved in all of these transactions and the lender required an
incentive to hazard his money. Thus, despite the hostile position of the church towards usury,
many Christians did engage in the credit industry and required some return on their investments.
However, religious attitudes did have several significant impacts on how these individuals were
compensated.
Not all credit came in the form of direct loans; many Christians engaged in more socially
acceptable lending practices. Credit was used by Christian merchants to facilitate sales. The
profit derived from this lending behaviour was hidden by tying it to the transfer of the good.
39

Some wealthy Christians even used Jewish lenders to disguise their activities. They acted as
silent partners to fund direct loans made by their Jewish colleagues. For example, in the town of
Santa Coloma, the nobles, Galcerandus de Tous and Bernat Zanou, provided the bulk of the
money used by a partnership of seven Jewish lenders.
40
In these ways, Christians benefited from
extending credit to their co-religionists, yet the prohibition against usury was avoided.
An additional method to avoid the open usury, which had been condemned at the Council
of Tours in 1163,
41
was the way in which the loan was denominated. In Spain, for example, some
loans, made predominantly by Christians, were denominated in units of wheat. The creditor

37
Milton, 308-309.
38
William Shakespeare, The Merchant of Venice, Act I, Scene III.
39
Milton, 306-314.
40
Ibid, 315-316.
41
Huscroft, 44.
Scott 11

could thus realize a return through increases in the price of wheat.
42
Wheat was not the only asset
which was used to hide the return on loans.
Another example of hidden compensation for loans appeared in the medieval wool
industry. Wool production was essential to the English economy as it was the dominant export
good in the late medieval period. English monasteries would sell the wool produced in the future,
similar to a modern contract. Merchants would buy this wool up to 20 years before its
production. Italian merchants dominated the industry; for example, the two most significant
trading groups, the Riccardi of Lucca and the Frescobaldi of Florence, alone purchased over 50%
of the contracted wool. The monasteries, which typically had considerable assets, frequently had
difficulty with cash flow and consequently often accumulated large debts. The large cash
injections provided by these contracts were thus beneficial to the monasteries. On the other side
of the agreement, the merchants paid rates which were considerably lower than the prices of the
day. Although there was considerable variation in price, dependent upon, among other factors,
the record of the monastery in question, merchants could purchase wool at about a 20% discount
from the prices of the day. This discount served a similar function to the interest on a loan.
43

Thus merchants received compensation for investing their capital, while at the same time
avoiding the church prohibition on usury.
While some medieval Christians did engage in lending despite the stigma associated with
it, the prohibition against usury also spurred financial innovation. Several mechanisms were
devised to compensate creditors without the need for interest to be paid. For example, in
England, land was used to obtain financing without the need for interest to be paid. Under this

42
Milton, 312-315.
43
Adrian R. Bell, Chris Brooks & Paul Dryburgh, Interest rates and efficiency in medieval wool forward
contracts, Journal of Banking and Finance, volume 31, (2007), 365-366.
Scott 12

system, the borrower would transfer the title of the property to the creditor in exchange for a
payment. The title would revert to the borrower on a contractually-defined date, called the law
day, in return for repayment of the loan. If the money was not repaid, then the property would be
retained by the lender. While the creditor possessed the title, he collected the rents produced by
the land. These rents served as a substitute for interest.
44
The rights of borrowers and lenders
were further refined by the English Chancery courts and this process slowly gave rise to the
modern mortgage.
45
A similar phenomenon occurred in medieval Spain. In this case, Christians
would offer pledge-loans. The creditor would receive the profit from the land which was pledged
in the interim period until the date specified for loan repayment.
46
In both of these cases, the
spiritual conflict was avoided by not deriving profit directly from the loan itself.
ROYAL DEBT
Christian and Jewish creditors both played an essential role in European economic
activity during the medieval period. The credit transactions were not, however, limited to the
private sector. Many European regimes became major debtors as they sought to finance
increasingly costly conflicts. While Rome had been the victim of economic and military collapse
following its over-taxation and repeated debasement of the coinage,
47
European monarchs were
able to borrow funds from wealthy merchants in order to sustain their operations. In fact, the first
recorded public debt was in twelfth century Italy.
48
The public debt quickly spread throughout
Western Europe. In Edwardian England, the monarchy developed relationships with a series of

44
Michael S. Knoll, The Ancient Roots of Modern Financial Innovation: The Early History of Regulatory
Arbitrage, Oregon Law Review, volume 87, (2008), 108.
45
Ibid, 108-111.
46
Milton, 312-314.
47
Lopez, 3.
48
John H. Munro, The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability, The
International History Review, volume 25, number 3 (September 2003), 505.
Scott 13

Italian merchant societies which provided financial services to the English crown. From 1272 to
1294, Edward I was supplied with credit by the Ricciardi of Lucca. The Frescobaldi of Florence
became the primary creditors of the English monarch between 1299 and 1311. Finally, during the
reign of Edward III, the Bardi and Peruzzi of Florence provided credit to the king.
49
This
relationship ended rather unhappily for the bankers as the Bardi, Peruzzi and Acciaiuoli were
bankrupted when Edward III of England and Robert of Naples defaulted on their loans.
50
This
event cleared the way, however, for the rise to prominence of the Medici family which would
leave an indelible mark on Renaissance Europe.
COINAGE
The European economy of the medieval period was dependent upon precious metals for
much of its coinage. While some base metals and alloys were used for low value coins, the
majority of the value of European money was stored in silver and, beginning in the thirteenth
century, gold coins.
51
This resulted in several important problems. First, the money supply of
medieval Europe was tied to the supply of precious metals. This meant that the supply of coins
was inextricably linked to the mining of these metals, the transfer of these metals with other
regions outside of Europe, the wear caused by the use of coins and the effects of hoarding.
52

Throughout this period, Europe was a major exporter of precious metals to Asia which was
sustainable and beneficial so long as the production of these metals remained high.
53

Unfortunately, in the fourteenth and fifteenth centuries, there were repeated shortages in silver

49
Adrian R. Bell, Chris Brooks & Tony Moore, A Medieval Credit Crunch? Historian volume 100, (Winter
2008), 6.
50
Ferguson, 42.
51
Edwin S. Hunt & James M. Murray, A History of Business in Medieval Europe, 1200-1550, (Cambridge:
Cambridge University Press, 1999), 63.
52
Peter Spufford, Money and its use in Medieval Europe, (Cambridge: Cambridge University Press, 1988), 339-340.
53
Hunt & Murray, 63-64.
Scott 14

production.
54
This had the effect of exerting deflationary pressure on the European economy.
55

Ultimately, this reliance on precious metal production for coinage increased the instability of the
money supply in the kingdoms of Western Europe.
Furthermore, the incentive existed for monarchs, facing difficult financial circumstances
to debase the coinage. This meant reducing the precious metal content of the coins in question,
which reduced their value. Such debasements were accomplished by diluting the precious metal
content by mixing in cheaper metals, clipping or shaving coins, or by simply producing smaller
versions of the same denomination. This was an attractive option for many medieval
governments.
56
For example, the silver content of the English pence was reduced by about 47%
over the period between 1260 and 1499. The reductions in silver content were greater still among
currencies produced in Austria, Italy, France and Belgium: an almost 70% reduction for the
kreuzer
57
between 1371 and 1499, a 72% decline for the lira fiorentina
58
between 1280 and
1499, a 74% reduction for the livre tournois
59
between 1258 and 1499 and a decline of almost
84% for the hoet
60
between 1349 and 1499.
61
In the period following 1296, Philip the Fair of
France derived nearly 60% of his income through his debasement of the French currency.
62

However, such debasements of the coinage resulted in severe social costs as such action was
essentially a default on government debt.
63
In the case of Philip the Fair, there was an outcry
among the clergy and the nobles to return to the good money of Louis IX. This crisis was a

54
Spufford, 339-340.
55
Hunt & Murray, 63-64.
56
Carmen M. Reinhart & Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, (Princeton:
Princeton University Press, 2009), 174-175.
57
Kreuzer was a currency produced in Vienna, Austria.
58
Lira fiorentina was an Italian currency.
59
Livre tournois was the French currency.
60
Hoet was a currency in use in what is now Belgium.
61
Reinhart & Rogoff, 176.
62
Barkey & Katznelson, 495.
63
Reinhart & Rogoff, xxxii-xxxiii.
Scott 15

significant impetus behind the decision to expel the Jews from France.
64
In the fourteenth and
fifteenth centuries, the reduction in silver supply led to even more frequent and widespread
debasements of the coinages of Western Europe.
65
Thus, while it was a common practice
throughout this period, the debasement of the currency resulted in considerable economic
problems.
Another difficulty which was encountered as a result of the reliance on metal coinage was
the cost incurred to transport it. The cost of transportation, tolls, and guards made the transfer of
money a very expensive endeavour. It has been estimated that the cost to transport bullion from
Naples to Rome ranged from eight to twelve percent of the value of the specie.
66
These
exorbitant costs provided the impetus for developments in the financial sector.
MONEY-CHANGING AND DEPOSITS
Beyond the development of the credit industry, another key innovation, which helped
give rise to modern banking, was the evolution of money-changers in medieval Italian city-
states. Initially money-changers simply facilitated exchange by using their expertise to convert
between the many currencies in use.
67
However, in order to be successful at this practice, the
money-changers needed to establish a reputation as honest brokers. For this reason, in Lucca, all
money-changers (campsores) and spice dealers (speciarii) took an oath to commit, no theft, nor
trick, nor falsification.
68
The establishment of this reputation commenced the process wherein
money-changers began to accept deposits for safe-keeping. Eventually, the proliferation of these

64
Barkey & Katznelson, 495.
65
Hunt & Murray, 82.
66
Ibid, 64.
67
Ibid.
68
Thomas W. Blomquist, The Dawn of Banking in an Italian Commune: Thirteenth Century Lucca, in The Dawn
of Modern Banking, ed. Fredi Chiappelli, (New Haven: Yale University Press, 1979), 55.
Scott 16

deposits meant that individuals could use them to settle payments. Thus, some of the difficulties
resulting from the use of a precious metal coinage were avoided.
69

The replacement of the coinage with paper records culminated in the thirteenth century
with the bill of exchange (cambium per literas). This financial instrument served as tool for the
international transfer of currency and credit while avoiding the cost of transporting bullion. The
bill of exchange also avoided the churchs prohibition against usury. It allowed for the receipt of
an amount of one currency by one party on a certain date and the repayment of this debt on
another date in a different currency. The bill of exchange was primarily a tool for the merchant
class which allowed them an efficient mechanism for the transfer of money.
70

One notable group that played a major role in this industry was the Medici family. The
Medici began as members of the Money-Changers Guild (Arte de Cambio). In 1385, Giovanni
di Bicci de Medici was made the manager of the Roman branch of a Florentine bank operated
by his relative. Eventually, Giovanni returned to Florence and, when he died, his son inherited a
bank with branches in Florence, Venice and Rome. The Medici Bank was in fact a diversified
organization, made up of a collection of partnerships. Branch managers were compensated with a
share of the profits as they were junior partners in the enterprise. This diversification was the key
to the profitability of the Medici Bank.
71
The Medici family would later have a tremendous
impact on Renaissance Europe as two members of the family became popes and many others
became dukes and queens.


69
Hunt & Murray, 64-65.
70
Ibid, 65-66.
71
Ferguson, 42-48.
Scott 17

RISK MANAGEMENT
The troubles that could befall ships and caravans provided the impulse for innovation in
the financial sector in order to reduce the risk to merchants. In The Merchant of Venice, Antonio
lamented when he believed his ships were lost at sea and was nearly forced to forfeit a pound of
flesh.
72
In order to minimize the risk of financial ruin in the event of shipwreck or piracy,
medieval merchants began to enter into insurance contracts, known as bottomry. The earliest
insurance contracts were essentially conditional loans
73
that would be cancelled if disaster
struck.
74
Thus the loan was only repayable if the cargo arrived safely and, in the case of
misfortune, the merchant was only liable for avoidable damages. The interest rates for these
loans were based on custom and varied by Italian city-state. For example, the customary rate in
Pisa was 35 percent. However, canon law prohibited the sea loan in 1234.
75
Another popular
mechanism for the sharing of risk in medieval Italy was the commenda organization which
unlike the sea loan was based on equity. These organizations typically existed for the duration of
the trading voyage and provided a way to share the risks of the expedition. The share of the
profit which was allocated for each partner in this organization was based on custom.
76

The first true insurance contracts appeared in the 1350s. The premiums on these contracts
typically fell in the range of 15 to 20 percent of the value of the asset insured. By the fifteenth
century, the rate had fallen to below 10 percent.
77
The archives of Francesco Datini, a merchant,

72
Shakespeare, Act III Scene II, Act IV Scene I.
73
These conditional loans were known as sea loans.
74
Ferguson, 186-187.
75
Maria Brouwer, Managing Uncertainty through Profit Sharing Contracts from Medieval Italy to Silicon Valley,
Journal of Management and Governance, volume 9, (2005), 239-240.
76
Ibid.
77
Ferguson, 186-187.
Scott 18

provided an example of an early insurance contract from 1396 by which the insurer assumed all
risk which:
are of God, of the sea, of men of war, of fire, of jettison, of detainment by princes,
by cities, or by any other person, of reprisals, of arrest, of whatever loss, peril,
misfortune, impediment or sinister that might occur, with the exception of packing
and customs,
78

until the safe arrival of the goods at the port of destination. Eventually standardized insurance
contracts would be incorporated into the lex mercatoria (mercantile law).
79
However, maritime
trade was not the only sector to witness the invention of new mechanisms to share risk.
New types of businesses arose in the medieval period to help manage risk. Medieval Italy
was the birth place of the long-term business partnerships. Unlike earlier single-venture
businesses, these partnerships were established to operate for an amount of time decided by the
shareholders. The downside to this business model was that, in the case of bankruptcy, the
partners would be liable. Despite the risks, this model quickly proliferated throughout Italy to the
point that each town in thirteenth century Italy contained hundreds of these firms.
80
The
medieval period also witnessed the creation of the first corporate charter. In the following
centuries, incorporation was used to facilitate a variety of public and semi-private ventures. It
was not until the modern period that the corporation became the omnipresent private enterprise.
81

These new ways of doing business helped medieval entrepreneurs manage uncertainty and
formed the basis for modern risk management mechanisms.

78
Florence Edler de Roover, Early Examples of Maritime Insurance, Journal of Economic History, volume 5,
issue 2 (November 1945), 188-189.
79
Ferguson, 187.
80
Hunt & Murray, 62.
81
Morton Keller, The Making of the Modern Corporation, The Wilson Quaterly, volume 21, issue 4, (Autumn
1997), 58.
Scott 19

MATHEMATICS
Finally, one of the most important developments of the medieval period was the
introduction to Europe of Hindu-Arabic numerals. These numerals were far more efficient in
calculations than the Roman numeral system. This was recognized by the Italian mathematician,
Leonardo of Pisa,
82
who undertook their introduction to Europe from North Africa with his book,
Liber Abaci (The Book of Calculation) which was published in 1202.
83
The implications of this
revolutionary text on finance were clear in that Fibonacci explained concepts such as present
value, which was a future revenue stream discounted to its value today.
84
The ultimate value of
the Liber Abaci rested, however, with the introduction of Hindu-Arabic numerals which would
serve to facilitate European trade, finance and accounting.
CONCLUSION
Many of the financial institutions of the modern world can trace their origins back to
Western Europe during the medieval period. A variety of social factors constrained the actions of
individuals in a society organized primarily along lines of redistribution and reciprocity. The
power of the Catholic Church was set against the practice of usury. This prohibition spurred
financial innovation as creditors and debtors developed new mechanisms for compensating
lenders. At the same time, the Jewish community was exploited as financiers and discriminated
against. Meanwhile, developments in public financing allowed the kings of Europe to fight their
costly wars. However, even with the novel application of the public debt and the levying of
special taxes on minorities, governments sometimes defaulted or debased the currency. The

82
Leonardo of Pisa is more commonly known as Fibonacci.
83
Ferguson, 33.
84
Ibid.
Scott 20

difficulties which arose as a result of the precious metal coinage also led to financial innovation
and the origins of modern banking. Western European merchants developed new ways to
manage risk and many of these innovations formed the basis for modern financial organizations
and instruments. Finally, the spread of ideas in mathematics from Asia aided the development of
modern finance. In combination, these factors laid the necessary groundwork for the creation of
the financial instruments and institutions of the modern world.

Scott 21

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