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The bill of exchange was one of the most important financial innovations of the medieval period, and it was a key instrument in the development of the early banking system that emerged in the commercial revolution of the High Middle Ages. The bill of exchange was a contract between a creditor and a debtor whereby the debtor agreed to pay a certain sum of money in a certain place at a certain time in return for a corresponding sum received in another place at the time of the contract. The bill of exchange allowed merchants to transfer money across long distances without the risks of carrying cash, and it also allowed merchants to obtain credit for their operations. The bill of exchange was the ancestor of the modern promissory note and bank draft, and it was a major contribution to the development of the modern banking system.
The standard English-language treatment is Peter Spufford, “Money and Its Use in Medieval Europe” (1988), and the indispensable modern complement is John H. Munro, “The Medieval Origins of the Financial Revolution,” International Journal of Accounting (2003). The surviving bankers’ ledgers of the Alberti of Florence (the Spedale degli Innocenti ledger) are the primary sources.
The Origins of the Bill of Exchange
The origins of the bill of exchange are obscure, but the most important roots are in the commercial practices of the Italian merchants of the twelfth and thirteenth centuries. The Italian merchants — from Genoa, Venice, Pisa, Florence, Lucca, Milan, and Siena — were the most active participants in the long-distance trade of the High Middle Ages, and they developed a wide range of financial techniques to support their commercial operations. The bill of exchange emerged from these commercial practices in the late twelfth or early thirteenth century, and it gradually became a standard instrument of international trade.
The earliest documented examples of bills of exchange date from the late twelfth and early thirteenth centuries, and they appear in the records of the Genoese and Florentine merchants. The Genoese merchants in particular were active in the development of the bill of exchange, and the Genoese notary records from the late twelfth century contain references to bills of exchange. The Florentine merchants also developed the bill of exchange, and the Florentine banking houses of the fourteenth and fifteenth centuries were major users of the instrument.
The Mechanics of the Bill of Exchange
The mechanics of the bill of exchange were relatively simple, but the instrument had a profound impact on the medieval economy. The bill of exchange was a contract between two parties — typically a merchant in one city and a merchant in another city — that specified the amount of money to be paid, the place and time of payment, and the exchange rate between the two currencies. The bill of exchange was typically drawn by the merchant in the city of origin and accepted by the merchant in the destination city, and it was often guaranteed by a third party — a banker or a wealthy merchant — who assumed responsibility for the payment.
The bill of exchange had a number of important features. First, it was negotiable: the bill could be sold or transferred to a third party before the date of payment, and the third party could enforce the bill against the original parties. Second, it was discountable: the holder of the bill could obtain a discount on the face value of the bill in exchange for immediate cash, and the discount was a form of interest on the loan. Third, it was multicurrency: the bill could be drawn in one currency and paid in another, with the exchange rate reflecting the supply and demand of money in the two markets.
The bill of exchange had several advantages over the carrying of cash. First, it avoided the risks of robbery and loss associated with the transportation of cash across long distances. Second, it allowed merchants to obtain credit for their operations, since the bill could be discounted or sold to a third party before it matured. Third, it facilitated the integration of European money markets, since the exchange rates between different currencies reflected the supply and demand of money in different markets.
The Development of Italian Banking
The development of Italian banking in the thirteenth and fourteenth centuries was a major feature of the medieval economy, and the bill of exchange was a central instrument of the Italian banking houses. The Florentine banking houses of the thirteenth and fourteenth centuries — the Bardi, the Peruzzi, the Acciaiuoli, the Strozzi, and later the Medici — were major financial institutions, and they used the bill of exchange to support their commercial operations and to provide financial services to the papacy and the great secular rulers of Europe.
The Florentine banking houses developed sophisticated financial techniques that built on the bill of exchange. The Florentines developed systems of double-entry bookkeeping, financial reporting, and risk management that were major contributions to the development of the modern banking system. The Florentines also developed systems of correspondent banking — networks of agents in different cities that allowed the banking houses to transfer funds and to provide financial services across Europe. The Florentine banking houses were major contributors to the development of the modern banking system.
The Sienese banking houses — the Buonsignori, the Tolomei, and others — were also major financial institutions of the thirteenth and fourteenth centuries. The Sienese bankers were active in the Champagne fairs and in the long-distance trade of the period, and they contributed to the development of the bill of exchange and other financial techniques. The Sienese banks were eventually absorbed by the Florentine banks, and the Sienese banking system declined in the fourteenth and fifteenth centuries.
The Venetian banks were also major financial institutions of the medieval period. The Venetian government established the Banco di Venezia (Bank of Venice) in 1369, and the bank was a major financial institution that supported the commercial operations of the Venetian Republic. The Venetian bankers developed sophisticated financial techniques, and they contributed to the development of the modern banking system.
The Use of the Bill of Exchange
The bill of exchange was used for a wide range of purposes in the period. The bill was used by merchants to finance the long-distance trade, by kings and princes to transfer funds across borders, by the papacy to support the administration of the Church, and by private individuals to transfer funds to family members and business partners. The bill of exchange was a versatile instrument that served a wide range of clients, and it was a major contribution to the development of banking.
The bill of exchange was also used for money laundering and tax evasion in the medieval period. The merchants and bankers who used the bill of exchange to transfer funds across borders could avoid the taxes and regulations of the kingdoms in which they operated, and they could conceal the source and destination of their funds. The bill of exchange was a versatile instrument that could be used for legitimate and illegitimate purposes, and the medieval authorities were often unable to regulate the use of the bill effectively.
The bill of exchange was also used for speculation in the medieval period. The merchants and bankers who traded in bills of exchange could profit from the fluctuations of the exchange rates between different currencies, and they could speculate on the future movements of the exchange rates. The bill of exchange was a major instrument of speculation in the medieval period, and it contributed to the development of the modern financial markets.
The Decline of the Medieval Banking System
The decline of the medieval banking system in the late medieval and early modern periods was a major feature of European economic history. The Italian banking houses of the fourteenth and fifteenth centuries were the major financial institutions of the period, and they suffered a series of major crises in the fourteenth and fifteenth centuries that contributed to the decline of the medieval banking system.
The bank failures of the 1340s were a major crisis of the banking system. The Bardi and the Peruzzi, two of the largest Florentine banking houses, failed in 1345–1346, with the Bardi defaulting on debts of approximately 1.5 million florins and the Peruzzi defaulting on debts of approximately 600,000 florins. The failures were caused by a combination of bad loans to kings and princes — most notably the English King Edward III, who defaulted on a major loan in 1345 — and the disruption of the commercial economy by the Black Death and the Hundred Years’ War.
The decline of the Italian banking houses was also caused by the shift of the commercial and financial center of Europe from the Mediterranean to the Atlantic in the late fifteenth and early sixteenth centuries. The discovery of the New World by Christopher Columbus in 1492, the opening of the sea route to India by Vasco da Gama in 1498, and the Magellan expedition’s circumnavigation of the globe in 1519–1522 all contributed to the shift of the commercial and financial center of Europe from the Italian cities to the Atlantic powers of Spain, Portugal, France, England, and the Netherlands. The shift undermined the Italian banking houses and contributed to the decline of the banking system.
The Legacy of the Bill of Exchange
The legacy of the bill of exchange is significant. The bill was a major financial innovation of the medieval period, and it contributed to the development of the modern banking system. The bill of exchange was the ancestor of the modern promissory note and bank draft, and it continues to shape the modern financial system. The bill of exchange was also a major factor in the integration of the European economy and the development of the global economy.
The bill of exchange is a major subject of modern historical and economic study, and the scholarship on the bill has illuminated the complex financial history of the medieval world. The bill of exchange is a subject of ongoing research in the modern era, and it continues to shape the debates about the origins of the modern banking system and the modern financial system.
Sources
Principal sources used in this article:
- Peter Spufford, Money and Its Use in Medieval Europe (Cambridge, 1988).
Further reading:
- John H. Munro, “The Medieval Origins of the Financial Revolution,” International Journal of Accounting (2003).
For a recent single-volume synthesis with full scholarly apparatus, see the relevant chapter of Barbara H. Rosenwein, A Short History of the Middle Ages (University of Toronto Press, 2014).