The Third Pillar

The Commercial Revolution

The feudal economy did relatively well when there were few trading opportunities. Over time, though, Europe learned to trade with, and through, the Muslim lands. Moreover, demand for agricultural products from the growing towns, as well as travel routes that were safer from brigands, helped the revival of trade and commerce. Feudal lords now not only had the opportunity to convert the manor’s produce into money, the money could buy an increasing variety of goods. The growing attraction of producing for, and consuming from, the market did not sit well with traditional feudal practice.

For key to the feudal system was that the individual did not own the land outright; instead, the peasant managed it while he was able-bodied and passed the management on to his kin when he could no longer manage.8 Everyone in the family had customary rights to the land, which made those rights difficult to sell. In turn, this ensured that a long-lived community built around that land, but productivity was generally low, since a farmer’s kin were not necessarily good farmers. In fact, the absence of a market protected the peasant—his low productivity hurt his household’s production, but did not jeopardize his right to farm land.

As feudal lords became more attracted to monetary income, and as land became easier to sell, this changed. In order to enhance production, the feudal lord had to be able to transfer land to more productive tenants or owners. In England, soon after the turn of the millennium, the courts started overlooking the customary rights of kin, making freehold land easier to bequeath or sell.9 Even tenancy that was tied in with feudal obligations, known as copyhold tenancy, became better defined and easier to transfer over time.10 Scholars argue over whether there was a dramatic change in the legal treatment of property, or whether England was intrinsically more favorable to sales. Whatever the reason, the interests of the Church also lay in freeing property from customary entanglements. If the rights of inheritance, for example, narrowed to direct relatives rather than residing with all kin, land would be easier to bequeath to third parties or to sell. And a primary beneficiary of bequests to third parties was the Church. An elderly childless widow or widower could easily be persuaded that their route to salvation lay in willing the bulk of their property to the Church. Even if they were not persuadable, often the only one who could write down a will or hear last orders was the not entirely disinterested parish priest.11

The net effect of a freer land market was that less-productive peasants had an incentive to sell land or were strong-armed into doing so, often to larger landowners who had surplus cash, and who could farm the combined land more profitably. Land holdings became more concentrated in fewer hands but agriculture also became more productive. Unfortunately, a number of peasants were forced into marginal holdings or entirely out of the manorial community as they sold, or were evicted from, the land that tied them to it. At the bottom, holdings became smaller as the size of the peasant family grew. As the small peasant’s holdings were subdivided and average incomes fell, a growing number of second and third sons had to fend for themselves outside the feudal manor. The expansion of the market, as is sometimes its wont, resulted in growing inequality.

These were therefore extremely difficult times for many European peasants, especially those who no longer had the protection of the manorial community. Average incomes were not only barely above the level needed for subsistence but also were highly variable over time.12 The failure of a harvest or the death of livestock were not infrequent events. One estimate suggests that even the relatively wealthy English peasant could expect to face serious calamity every thirteen years.13 Some work did open up outside farming, especially in the growing towns where merchants and artisans prospered, but it was rarely enough.

Despite their low and highly variable incomes, death by starvation was surprisingly rare among the peasantry. The reason was simple: Informal community support within the manor for those who still belonged to one, and formal charitable institutions run by the Church, such as almshouses, leper houses, pilgrim centers, educational institutions, and monastic hospitals, for those outside the manor, constituted a social safety net. Harder times for the poor explain why the Church became more aggressive in its fight against usury.14

Usury prohibitions limited the profits that anyone with excess wealth could make by lending to those in difficulty. At the same time, a lender faced a loss of social status and even excommunication if he was condemned as a usurer. Perhaps the businessman was willing to take this risk when young. As he grew older and came closer to the feared inevitable meeting with his Maker, the graphic pictures painted by the clergy of the torments that awaited him in hell were an increasing source of worry. The prohibition on usury thus helped channel the wealth of the rich away from making usurious consumption loans and toward helping poorer unfortunates. Such help could be given informally, or formally through charitable donations to the Church. As in the Hebrew tribes, the prohibition on usury suppressed the market in favor of the community. Thus as the commercialization of agriculture created greater numbers of the poor, the Church took their side by restricting the debt market.

The Church’s actions were also not unrelated to the political battles it was fighting at that time with the secular authorities. The reforms initiated by Pope Gregory VII in 1075—the so-called Papal Revolution—attempted to separate the Church from the feudal hierarchy, especially the domination of the Holy Roman Emperor.15 The details of the conflict, which culminated in the victory of the Church, need not concern us but some aspects are important. In order to attract support for their cause, Church scholars systematized and rationalized the Church’s vast legal traditions. A comprehensive body of canon law emerged, which could now guide Church courts, and which helped reaffirm that all Catholic authorities, including the powerful emperor, were constrained by a higher, principle-based, law. Furthermore, in response to competition from the now-more-reliable Church courts governed by canon law, feudal rulers developed their own legal system.

Both the Church and the ruler competed to offer better justice to attract plaintiffs into their courts. Since the poor and the powerless benefited disproportionately from the law, courts consequently became more sympathetic to their problems. Better-enforced usury prohibitions became one element of that competition.

The Church’s actions thus had mixed effects on the poor peasants and their communities. The Church may have helped make property more salable in order to expand its own wealth.16 Easier salability allowed feudal lords to move unproductive peasants off their land, rendering them destitute. However, the Church was probably also motivated by the welfare of these very same peasants and concerned about the stability of the community when it banned usury and exploitative market transactions. And it did use some of the wealth it accumulated to provide charity to the destitute.

The Intellectual Support for the Ban on Usury

The Church could appeal to a long line of thinkers, past and present, for support for the ban on usury. The Greek philosopher Aristotle, who was being rediscovered in this period, was firmly against interest on loans. He saw the production of goods to satisfy physical wants such as food and clothing as useful economic activity. Farming, the raising of livestock, and manufacturing were all productive. In contrast, trade, which simply exchanged goods for one another; hire, which lent out goods for money; and usury, which lent out money for money, produced nothing that satisfied physical wants. Of the three, “The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from its natural use of it. For money was intended to be used in exchange, but not to increase at interest.”17

St. Augustine, a guiding light of the early Church, similarly warned about the three sins of fallen men: the lust for power, sexual lust, and the lust for money. Of these, he was most ambivalent about the lust for power, which if accompanied by a sense of civic duty and honor, could protect the community against external attack.18 He also discussed in his startlingly frank Confessions how his private desires such as sex—as a young man, he was sexually active, and later, he lived with a mistress who bore him a son—came in the way of his relationship with God. Here too he seemed to be ambiguous, if not understanding. About the lust for money, though, he was clear in his condemnation.

Drawing on such sources, Church scholars in the Middle Ages concluded that trade or enterprise was necessary but perilous to the soul. The businessman could always be tempted to hanker after excess profit by charging more than the just price—the price that provided adequate income for the seller to maintain his station in life. This constituted avarice, a deadly sin. Working hard to enhance profits was clearly not in accordance with medieval thinking. Worse still was finance, which “if not immoral, was at best sordid, at worst disreputable.”19 These strongly Aristotelian attitudes, which still dominate many societies today, reflected a suspicion of the middleman. They were thought to make money not by adding intrinsic value to the traded item, but by moving goods or money to areas of shortage, or even, many believed, by creating the shortage in the first place.

WHY THE CHURCH BECAME MORE TOLERANT OF USURY

Important developments eventually moderated Church hostility toward business and finance in Europe. The Black Death, a plague more deadly than any before in Europe’s recorded history, did much to shake the distribution of income and social structures. There were now relatively fewer poor to protect. Moreover, commercial activity also picked up; the development of new military technologies led to larger states, and therefore larger, safer, internal markets. There was consequently more opportunity to trade. Lending to merchants increased. With the state also demanding loans to finance its larger spending, lending did not seem so exploitative—it was no longer primarily consumption loans to the poor untutored peasant but rather loans to financially sophisticated borrowers (as the modern parlance goes). Furthermore, it was less important for the Church to protect the borrower as more of the wealthy competed to lend. Also, the Church itself became an important usurer as it lent out the enormous wealth it had accumulated following the Papal Revolution.

Eventually, the Church’s wealth made it a target for the state. As critics attacked the Church during the Protestant Reformation, monarchs seized an opportunity to cut the Church down to size, and it was rarely a factor in governance again.

The Black Death

In October 1347, twelve Genoese trading ships docked at the Sicilian port of Messina after a long journey through the Black Sea. Many of the sailors on board were dead, covered with black boils that gave the illness its name, the Black Death. The Sicilian authorities ordered the “death ships” out of the harbor, but it was too late. Over the next five years, and over the course of subsequent recurrences, the bubonic plague pandemic would wipe out an estimated third of Europe’s population.

The humanitarian catastrophe had a thin silver lining. The lucky peasantry that survived the Black Death now could farm much larger land holdings, could concentrate on better land, and were thus significantly richer. For instance, in 1341 in the English village of Stoughton, 52 percent of landholdings were eleven acres or less. By 1477, only 16 percent were that size, with 58 percent of holdings larger than thirty acres.20 With many in the community becoming more prosperous, life became less precarious, and the need for emergency consumption loans and Church charity diminished.

The poor were still around, albeit fewer in number. Fortunately, with more people possessing surplus resources, competition to lend to those in adversity increased. With vast tracts of now-untilled land as well as commercial opportunities in towns beckoning the poor, the extremes in bargaining power that might have led to debt bondage no longer prevailed. Indeed, across much of Western Europe, the Black Death precipitated the end of serfdom.21 Greater prosperity and competition to lend that prosperity now diminished the old rationales for prohibiting usury.

As we will see throughout the book, natural or economic catastrophes and technological progress are the big drivers of societal change. After the Black Death, technological progress took over. Francis Bacon, the seventeenth-century courtier and philosopher, thought gunpowder, printing, and the compass were the three greatest inventions known to man.22 Their arrival in the West played a part in the expansion of markets, and the further weakening of the feudal community as well as the Catholic Church. They also heralded the rise of the nation-state, a key player in our narrative.

Cannons and Internal Commerce

In feudal Europe around the turn of the first millennium, all that it seemed to take to create a self-sufficient political entity—it would be too much to call this a state—were fortified walls and a retinue of armed men. Indeed, often the first use of the independent taxation authority a town received was to build a strong wall—a policy that still appeals to some of our politicians.23 In the fourteenth century, by some counts there were over one thousand separate political entities in Europe.24 Each entity levied its own duties, taxes, and tolls, especially on goods crossing its borders, which increased the cost of transporting goods over long distances. These were just the legal impediments to commercial traffic; entrepreneurial lords could indulge in their own banditry, while sea captains could engage in piracy. If you drive alongside the Rhine near Frankfurt today, you will see the castles of the original robber barons at regular intervals, though today they only relieve tourists of their money, and in a far more civilized way than in the past. All these impediments ensured that the size of the market any producer could safely and profitably access was quite small—often only within the borders of the little political entity he resided in.

The cannon changed everything. The Chinese invented gunpowder, but it was the Europeans who fully discovered and developed its destructive potential. At the battle of Crecy in 1346, English bowmen used small bombards, which, primed with gunpowder, shot little iron balls to frighten enemy horses.25 A hundred years later, massive siege cannons could demolish even the strongest fortifications. Techniques of fortifying changed in response, so the net effect of the cannon was to increase both the cost of attack and of defense.

Military techniques also changed. Cannonballs and musket fire could slaughter charging armored knights on horseback. However, muskets took time to reload, which meant an experienced musketeer even in the beginning of the seventeenth century could shoot a round only once every two minutes.26 Against a cavalry charge, this meant essentially only one shot between the enemy coming into range and the commencement of hand-to-hand combat. The tactical solution was to have musketeers drawn up in long parallel lines, with the first line firing then stepping behind the second to reload, and so on, so that near-continuous volleys of fire could be directed at the enemy. To be effective, the army needed many more recruits with substantial drilling and discipline, which meant a large standing army.27 The size of armies of some states increased tenfold between 1500 and 1700.28

To afford both cannonry and an army, any political entity required a larger catchment area, both to find peasant recruits and to find taxes to pay their bills. Little political entities no longer had the population nor could afford the minimum necessary expenditure. The average size of the state increased as entrepreneurial rulers started integrating smaller entities in the fifteenth century, and by the end of the century, the number of entities had halved to around five hundred. By 1900, these were down to twenty-five or so.29

The expansion in the size of the political state also meant an expansion in the size of its domestic market. Monarchs increasingly obtained monopoly control over violence within their country by controlling the powerful landed magnates, a subject we will explore in greater detail in the next chapter. They also suppressed the entrepreneurial robber barons and pirates, making trade routes safe.

This meant that producers could sell in the entire national market. Moreover, in the thirteenth and fourteenth centuries, aids to navigation like the dry compass and the astrolabe, coupled with new technologies in ships such as multiple masts with lateen sails and the sternpost-mounted rudder meant ships no longer had to hug the coast, and could venture much farther out at lower risk. This expanded trade, and thus added to the size of the accessible market. With larger available markets, producers could specialize, as well as raise the scale of their production, thus reducing unit costs of production. As the prices at which they were willing to sell fell, demand for goods increased.

In sum, political consolidation led to economic integration. When combined with maritime technological innovation that allowed trade with more distant land, producers could now exploit economies of scale. European production of crafts and manufactured goods, centered in towns and cities, expanded. And as markets delivered all manner of goods, the manor too specialized, with some focusing on cash crops like grapes, transformed into wine, instead of the earlier emphasis on necessities like cereals—for cereals could now be bought with the money obtained from selling wine.30

The increase in production and trade played an important role in weakening the case against usury. A master craftsman or merchant wanting to borrow to finance an expansion in his business or trade was not in the sympathetic position of an illiterate peasant living at the margin of starvation. As the community turned from consumption loans to small production or trade loans, public attitudes toward usury became more favorable. After all, it seemed only fair that those who sought commercial loans to make profits should pay a share of their profit out as interest.

The Powerful Interests

Moreover, the monarch was now an interested party. With the increase in the expense of fighting wars, he needed additional sources of revenue. The merchants, artisans, and moneylenders in the growing towns could be taxed, but yet more tax revenue could be obtained if they were freed somewhat from Church regulations concerning the just price at which transactions could be done or the interest that could be charged, and allowed to make larger taxable profits.

Furthermore, when rulers still needed funds after squeezing all they could out of the taxpayer, debasing the currency, and seizing the estates of weak lords, they had to make their way to the moneylender. There was always a danger that the king could turn on his lenders, labeling them usurers and refusing to repay. The few who did lend did so at high rates. They kept the impecunious monarch on a tight leash so that if he defaulted, he risked shutting off further recourse to loans, which might especially weaken his ability to fight off his enemies. So monarchs repaid enough to keep the loan spigot open, and were inclined to look for ways to permit such lending.

There was also a mighty potential lender: the Church itself. It had become rich, in part because of the way it had shaped rules governing usury and inheritance. Church treasuries were full of reliquaries, candlesticks, and vessels made of precious metals, which not only increased the grandeur of Church services, but also could easily be melted down, coined, and loaned. The French historian Henri Pirenne asserts that “the Church was the indispensable moneylender of the period.”31

With both monarchs and the Church administration inclined to allow some borrowing and lending, ways had to be found. Many in the Church were not comfortable with violating what they believed was a Scriptural ban. Financial innovation helped satisfy those in the Church looking for a fig leaf that the letter of the interest prohibition was not breached. For example, bills of exchange allowed a borrower to pay interest to a lender provided the borrowing was done in one currency and repayment in the other. The interest payment was hidden in the rate at which one currency was exchanged for the other, but could also be justified as a compensation for the exchange rate risk the lender bore.32

Similarly, the Church, following Roman law, allowed a penalty imposed for late payment, poena detentori. It was then a simple matter to lend with a fixed date for repayment and an implicit agreement that the borrower would not repay by that day. When he paid a few days later, a penalty was tacked on, which surprisingly approximated the market interest that ordinarily would have been charged by less conscientious lenders! When there is a will, the market finds a way around impediments; financial innovation helped finesse the Scriptures, much as it helps aggressive financiers avoid regulations today.

The State Moves Against the Church

Not only was the Catholic Church inclined to turn a blind eye to some types of lending, it was becoming weaker politically once again. Its pronouncements, including on usury, began to carry less weight. The Church’s wealth made it an attractive target for monarchs. They preferred their subjects’ wealth to stay within their control rather than be transferred into the hands of a distant, and possibly antagonistic, Rome.33

Much as social media today has allowed politicians to reach people directly, bypassing the filters of the mainstream press, Gutenberg’s movable-type printing press allowed critics of the Church, abetted by the local prince, to gain direct access to the masses. The reduced cost of printing pamphlets, as well as the spread of literacy, especially among the growing business community, ensured that the Church could be challenged and the arguments would reach many more people than in the past. Indeed, conservatives at that time warned that “printed books and broadsheets would undermine religious authority, demean the work of scholars and scribes, and spread sedition and debauchery.”34 They were right! For instance, over three hundred thousand copies of Martin Luther’s theses against the Catholic Church were circulated between 1517 and 1520, something that would not have been possible without the press.35

Additional pressure for reform came from secular law and secular courts that increasingly competed with the Church to try usury cases. Over time, as commercial and state activity necessitated the charging of interest, secular courts became willing to enforce loan contracts, especially when interest rates were moderate. French and English monarchs adopted the legal fiction that their moneylenders were to be considered Jews for legal purposes, and came under secular law courts.36 Judges, however, needed more than workarounds. Scholarly arguments were made to support the practical judgments of secular courts. As monarchs grew more powerful and independent of the Church, this meant more protection to usury.

As selective violations of usury prohibitions, such as royal or commercial borrowing as well as Church lending, increased, usury prohibitions became ever more difficult to justify as a purely religious matter. As the historian Richard Tawney has argued, the religious arguments for the prohibition on usury, by their very nature as moral arguments, had to apply universally, even though they were meant primarily for consumption loans to the poor. With the emerging range of new, seemingly defensible, reasons for lending at interest, the Church faced questions about how general the religious arguments really were.37

THE CHURCH CHANGES ITS VIEW

As the Reformation swept across Europe, scholars proposed new doctrines to rationalize the expanding markets and growing prosperity, as well as the needs of the emerging powerful monarchs. Perhaps the most important of these from a commercial perspective was the sixteenth-century French theologian and pastor John Calvin, who fled Catholic France for the Swiss city of Geneva, where he became extremely influential. Indeed, in The Protestant Ethic and the Spirit of Capitalism, the German social historian Max Weber attributed the rise of the archetypal capitalist to the teachings of John Calvin.

In Weber’s view, the true capitalist is not the flamboyant gambler who risks all or the unscrupulous speculator who wheedles his way to riches, but the temperate, reliable, hardworking businessman, “with strictly bourgeois opinions and principles.”38 The essence of modern capitalism is the steady accumulation of wealth, not because of the pleasures it can buy or the material needs it can satisfy, but for its own sake. Indeed, far from unbridled greed and debauchery, rational capitalism combines a single-minded focus on accumulation with a frugal lifestyle. What Calvin did for capitalism, according to Weber, was to provide it a moral legitimacy in a world where avarice was a sin.

Calvin emphasized the notion of calling, or predestination—that God has chosen some to be saved from damnation, and that their moral obligation is to do their duty in the world. Rather than abandoning the world, as was the Catholic monastic ideal, one had to embrace it. The practicing Calvinist had to have faith that he was one of the chosen, and had to demonstrate this faith through worldly activity. Business success was a sign of being one of the elect. Therefore, the accumulation of wealth was no longer to be condemned as avarice, but instead celebrated. Indeed, it was condemned only if wealth was spent on luxuries and high living—not only did conspicuous consumption reduce the savings necessary for investment, but it was also a waste of time, detracting from man’s true calling. The Calvinist vision of capitalist society was austere—and Geneva under the Calvinists was a harsh dull place—but it gave the single-minded entrepreneur a moral compass and justification that he did not have before. Various Protestant sects influenced by Calvinism then spread to Scotland, the Netherlands, and England, and thence to New England in the United States.

Calvin’s views on usury were consistent with his arguments about business. He maintained that the arguments against usury in the Old Testament were so that “mutual and brotherly affection should prevail among the Israelites,” so that they could trade conveniently among one another without conflict.39 It was an argument for a different age and different community circumstances, and could not be deemed universal—even in the Old Testament, usury had been permitted to strangers. Therefore, usury was permissible “if it is not injurious to one’s brother.”

Taking on Aristotle, Calvin asserted that money was barren only if unused. If used productively—invested in land or trade—the borrower is not defrauded when he pays a portion of his profits for the use of money. Thus all interest need not be condemned for otherwise “we would impose tighter fetters on the conscience than God himself.”40 Nor, Calvin argued, do the Scriptures prohibit a reasonable charge for money. Observing that the Hebrew word for interest, neshek, meant “to bite,” Calvin argued that the Bible prohibits only “biting” interest, which oppresses the poor.41

So while Calvin’s theology sanctified the pursuit of wealth and removed the associated taint of avarice, it also created a space for saving and lending at moderate interest rates. Such a positive interest rate was necessary to give the accumulative capitalist the incentive to be ascetic in his spending and save. It was also a pragmatic recognition that the needs of capitalistic business differed from those of the penurious household. While urging continued protections for the poor, Calvin opened the way for ordinary business lending.

Weber argues that Calvin also paved the way for the rise of capitalism. Of course, Calvinism may simply have been a rationalization and legitimization of emerging business practices rather than the wellspring for capitalism. Nevertheless, by transforming business from a furtive activity done in dark corners hidden from religious authorities to one that was publicly praiseworthy and indeed a route to salvation, Calvinism did much to encourage the further growth of business. Calvin may have imbued the bourgeoisie of Western Europe in the sixteenth century with a sense of being chosen and predestined, much as Marx anointed the proletariat of the nineteenth century.42

In sum, from about the middle of the fourteenth century, the Church’s attitude toward usury softened, probably as much by necessity as by conviction.43 Usurers were allowed to be buried once again in church graveyards, and various kinds of contracts involving interest were declared non-usurious, with only excessive interest being deemed sinful. While the Church’s views of business were not irrelevant after the Reformation, its influence certainly diminished greatly.