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Age of Invention: The Fast and the Finance
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As regular readers will know, I’ve lately been obsessed with England’s various economic transformations between 1550 and 1650 — the dramatic eightfold growth of London, in particular, and the fall in the proportion of workers engaged in agriculture despite the growth of the overall population.
As I’ve argued before, I think that the original stimulus for many of these changes was the increased trading range of English overseas merchants. Thanks to advances in navigational techniques, they were able to find new markets and higher prices for their exports, particularly in the Mediterranean and then farther afield. And they were able to buy England’s imports much more cheaply, by going directly to their source. Although the total value of imports rose dramatically — by 150% in just 1600-38 — the value of exports seems to have risen by even more, as there’s plenty of evidence to suggest that for most of the period England had a trade surplus. The supply of money increased, even though Britain had no major gold or silver mines of its own.
The growing commerce was the major spur to London’s growth, with English merchants spending their profits in the city, and ever-cheaper and more varied luxury imports enticing the nobility from their country estates. Altogether, the concentration of people and wealth in London must have resulted in all sorts of spill-over effects to further drive its growth. After the initial push from overseas trade, I suspect that by the late seventeenth century the city was large enough that it was running on its own steam.
But on twitter, economic historian Joe Francis offered a slightly different narrative. Although he agrees that a change to overseas trade was the prime mover, he suggests that the trade itself was too small as a proportion of the economy to account for much of London’s growth. I disagree, for various reasons that I won’t go into now, but Joe brought to my attention various changes on the monetary side. Inspired by the work of Nuno Palma, he suspects that it was not the trade per se, but the fact of an export surplus that was doing the heavy lifting, by increasing the country’s money supply.
An increased money supply should have facilitated England’s internal trades, reducing their costs, and allowing for greater regional specialisation. Joe essentially thinks that I’ve got the mechanism slightly back to front: instead of London’s growing demands having reshaped the countryside, he contends that the specialisation of the entire country is what allowed for the better allocation of economic resources and workers to where they were most productive — a process from which a large city like London quite naturally then emerged.
I have some doubts about whether this process could really have been led from the countryside. The regional specialisation that we see in agriculture, for example, only really starts to become obvious from the 1600s onwards, by which stage London’s population had already begun to balloon from a puny 50,000 in 1550, to 200,000 and rising. I also haven’t found much evidence of other internal trade costs falling. Internal transportation — by packhorse, river, or down the coast — doesn’t seem to have become all that more efficient. Roads and waggon services don’t show much sign of improvement until the eighteenth century, and not many rivers were made more navigable before the mid-seventeenth century either. This is not to say that England’s internal trade didn’t increase. It certainly did, as London sucked in food and fuel in ever larger quantities, and from farther and farther afield. But it still looks like this was led by London demand, rather than by falling costs elsewhere.
Besides, the influxes of bullion from abroad would have all been channelled through London first, along with most of the country’s trade. To the extent that monetisation made a difference to the costs of trade then, this would have made a difference first in the city, before emanating out to its main suppliers, and then outwards. I thus see the Palma narrative as potentially complementary to my own.
But what kind of a difference did monetisation make? This only becomes clear if we consider what it was like without easy access to coin. As Palma notes, there’s plenty of evidence that there were shortages of cash. Well into the seventeenth century, people were often being paid in kind, or needed to be extended short-term credit — extremely inefficient methods of exchange. If you’re paid in kind, you’re restricted to barter. But what happens when all you have is wheat, and the person with the hammer you’d like to buy doesn’t want any? And as for short-term credit, IOUs tended to rely on already knowing the person you’re exchanging with. You can’t just take something from a stranger and tell them to put it on the tab; you need to have a bit of trust between you already, for them to believe that you’ll actually eventually pay them back. Alternative currencies had much the same problem, tending to be highly localised. An absence of cash was a major restriction on economic specialisation.
Gold and silver coins had their own problems too, of course. They were cumbersome and risky to transport over long distances, especially for large transactions. People had to either carry bullion themselves, or use servants, professional carriers, or send it via other merchants who were headed in the right direction. Transporting bullion oneself cost time, and sending someone else cost a fee. And either way, whoever conveyed the coin was at great risk of being robbed along the way.
But there were ways to get around coin’s drawbacks. The English adopted the use of bills of exchange, for example, from the bustling financial hubs of Italy, Germany, and the Low Countries. Picture an agent, in York, of a merchant based in London. The agent has just sold the merchant’s goods and received some coin. The agent might take the risk of transporting the coin back to their employer in London. Or they might lend the coin they’ve just gained to a local York merchant, to buy goods in York that will be sold in London in a few months’ time. That York merchant can then pay the agent’s employer back in London in coin by a certain date, and with added interest, from the proceeds of selling their goods in London.
A bill of exchange was thus both a short-term loan and a way of transferring money without actually having to transport it. And potentially more. The intended recipient of the eventual payment — the employer of the merchant back in London — might use the bill of exchange itself in lieu of currency, perhaps selling it at a discount if they needed some coin in a pinch, before the York merchant’s debt was due. With bills of exchange, as one merchant in the 1640s put it, “traffic itself quickened”. Rather than being tied up on long journeys, gold and silver coin could more rapidly change hands. Which brings me to an important point of Palma’s, which is that bills of exchange were a complement, not a substitute, to cold hard cash. Bills of exchange only increased in use and sophistication when there was sufficient coin in circulation to allow it.
I even came across a fascinating early attempt to improve on bills of exchange, as well as to integrate England’s financial markets more generally. It reminds me of some of the services that have only recently been enabled by the Internet. In 1611, the king granted a patent monopoly to two courtiers, Arthur Gorges and Sir Walter Cope, to set up what they called a Public Register for General Commerce. The Public Register was, for the most part, intended to act as a sort of financial platform, but with physical offices in major towns, and printed registers distributed among them. The founders noted that people wishing to sell land or goods, or lend out their money, might use their register to advertise their prices and interest rates, for which they would have to pay just a small registration fee. Would-be buyers and debtors would be able to consult the register freely, and could also pay to advertise their need for goods or lands or loans.
The idea, like that of any platform, was that people in more remote locations, far away from physical markets, or whose affairs were being managed by a dodgy broker or money-scrivener, would be able to get the best prices or interest possible — regardless of which side of the transaction they were on. It was an attempt to create a national financial market, by using print to facilitate peer-to-peer transactions. Gorges and Cope even promised that the Public Register would never ask to hold or manage people’s assets on their behalves. Unlike money-scriveners and brokers, who did do this, there was thus no risk of clients losing all their assets because of a scrivener declaring bankruptcy. The Public Register would even allow people to use pseudonyms and go-betweens for their advertisements, to ensure privacy.
Most intriguingly of all, Gorges and Cope proposed using the register to facilitate transfers of money via third parties. Aware of the risks of transporting bullion, and of the interest costs involved with bills of exchange, they proposed the following model: a gentleman travelling, say, from York to London, and not wanting to carry much coin with them on their journey, could publicly register that they would pay out a certain amount of cash when they got back to York at a certain time, if they were paid the same sum when they got to London. A person in London wishing to transfer money to someone in York could thus consult the register, be put in touch with the travelling gentleman when they got to London, and just pay them, confident that their intended recipient up in York would get the same sum on the appointed time and day.
Both the visiting gentleman and the person in London would thus have the benefit of not needing to actually transport any bullion, and any fees taken by the Public Register could be much lower than the interest charged on a bill of exchange. Although it seems like this procedure would have involved quite a lot of trust, presumably the publication of the transaction by the Public Register was intended to dissuade any frauds. Through print, Gorges and Cope were hoping to do what various Internet platforms did for exchange between strangers.
Unfortunately, I’ve not found any evidence that the Public Register took off. It opened an office in London, but the public were too sceptical of the scheme, fearing that it could be used to find out the true extent of their assets. The founders put out a new prospectus, denying that the register was “a means to enter into men’s estates, and lay them open to every envious inquisition”. But the criticism stuck. Despite the promise that customers could use pseudonyms or go-betweens, one observer noted in a letter to a friend that “we cannot endure to have our estates be discovered whether we be rich or poor”. People seemingly preferred the privacy of disparate brokers and money-scriveners, and were willing to tolerate their high fees. Gorges and Cope were seemingly far too ahead of their time. And ultimately, for all the attempted financial innovations, it really came down to the quantities of gold and silver coin. More on that another time.
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