Overview of New Economic Systems
Introduction
A character in a Shakespeare play once said: “Neither a borrower nor a lender be.” The character meant that lending money was wrong. The play was written during Era 5. Lending money was actually very common in Era 5. Loans were one of many economic changes that completely reshaped global production and distribution. These changes formed new networks, a middle class, and helped create nation-states and capitalism.
Innovations in finance
First, let’s define credit. Credit is an agreement between a lender and a borrower. The borrower agrees to repay a loan to a lender. The agreement usually includes interest. Interest is what the borrower must repay in addition to the value of the loan. Humans have been using credit and interest since 2000 BCE in Mesopotamia.
So why did Shakespeare’s character say loans were so wrong? Why was it not commonly used? First, charging interest was often banned by the Christian Church and Islam. Groups of people who were excluded from most jobs were usually the only ones who charged interest. Many of these money-lenders were Jews. They already faced discrimination, which increased because of their work.
Fibonacci’s Liber Abaci
Europeans also didn’t know how to use new technologies for credit and interest. Leonardo of Pisa, also known as Fibonacci (c. 1175-1250), wrote a book called Liber Abaci that changed all of that. Fibonacci traveled to India and the Middle East. He learned about new mathematical concepts. Liber Abaci introduced Europe to fractions, decimals and Hindu-Arabic numbers (1,2,3, etc.). The Hindu-Arabic system worked a lot better than Roman numerals. Without the Hindu-Arabic system, a phone number like 867-5309 would look like this: VIII VI VII - V III NULLA IX. Fibonacci’s book helped solve many other economic problems like calculating interest and profits.
The first modern banks
Fibonacci’s book helped increase trade in Venice and Florence, Italy. These cities were part of large trade networks, and where the first banks opened. Today, banks seem normal. But a few hundred years ago, the idea of a bank was brand new.
Banks developed new ways to deal with money. They began using bills of exchange. A buyer would give a seller a bill of exchange. The seller would take it to the bank to get their money. Bills of exchange helped people exchange money without exchanging cash.
They are related to modern-day checks.
International currency exchange
For a while, the Mediterranean was a banking hotspot. But power later shifted to Northern Europe. Dutch, British and Swedish banks developed new financial technologies, like exchanging currencies. Currency exchange is when a type of money from one country is traded for money from another country. Trade got more efficient. You could move money without having to use coins or bills of exchange.
Bonds
Banks even dealt with the government’s money. Some countries paid for wars with bonds. Bonds are loans. People lend money to the government through a bank. The government promises to pay back the loan plus interest later on.
Colonialism and the rise of joint-stock companies
New financial technologies changed the way nations dealt with trade, war, and starting colonies. International trade could bring great profits. However, it was expensive to send a fleet of ships across the ocean. Few people would take the risk on their own.
Joint-stock companies helped lower the risk. Joint-stock companies were owned by several individuals. These individuals split business costs and shared profits. Of course, the business could still fail. However, joint-stock companies made it so a few people could lose some money instead of one person losing everything. Soon, stock markets emerged, making it easy to buy and sell shares in a company. For better or for worse, many more people were now traders.
Empires as businesses
Joint-stock companies had already been used in other places like China and in a different form in the Muslim world. They really took off in Europe in the 1500s and 1600s.
Colonies were often paid for by joint-stock companies, not governments. Joint-stock companies managed colonies for the government. For example, the British East India Company and Dutch East India Company managed colonies in India on behalf of the British and Dutch governments. But these were companies, not governments.
A global competition
European countries began to see other nations as competition. Many European governments promoted mercantilism. Mercantilism is a system for buying and selling goods. The goal is to sell more than you buy to make your country richer.
European demand for foreign goods was growing. However, it was expensive to bring those goods from other countries. Mercantilism increased interest in forming colonies for a couple reasons. The colonies had all the materials needed to make the stuff people wanted to buy. The colonies were also new places for Europeans to sell their goods. However, the people who lived in the colonies could not trade with other countries.
The rise of the middle class
Before, Europe had a few rich people and a whole lot of poor people. However, increased trade helped create a middle class. This had a lot to do with the rise of the merchant class. Merchants made money through trade but wanted more political power. All this led to a new social and political environment in the 1600s and 1700s.
Capitalism and the free market
Around that time, capitalism began. Capitalism is a system of buying and selling goods. A country’s businesses are controlled by private companies instead of the government or workers. Eventually, some European governments loosened their control over private companies. Joint-stock companies and individuals began hiring wage laborers.
These workers had to sell their labor. They also had to use their own tools and farms. Wage laborers made capitalists huge profits. However, capitalists did not have to share that profit with their workers.
Conclusion
The effects of these changes were huge. Credit grew in Era 5. Joint-stock companies directly caused colonies to expand. The other big change was production and distribution. Goods were produced in the European colonies, but they were sold in both Europe and the colonies. The flow of goods created new nations with separate social classes. Europeans adopted capitalism, which completely changed production and distribution around the world.
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Eman M. Elshaikh
The author of this article is Eman M. Elshaikh. She is a writer, researcher, and teacher who has taught K-12 and undergraduates in the United States and in the Middle East and written for many different audiences. She teaches writing at the University of Chicago, where she also completed her master’s in social sciences and is currently pursuing her PhD. She was previously a World History Fellow at Khan Academy, where she worked closely with the College Board to develop curriculum for AP World History.
Image credits
This work is licensed under CC BY 4.0 except for the following:
Cover: The courtyard of the Beurs in Amsterdam, Emanuel de Witte, public domain. https://commons.wikimedia.org/wiki/File:The_courtyard_of_the_Beurs_in_Amsterdam,_by_Emanuel_de_Witte.jpg
Mesopotamian tablet from c. 1780 BCE with a contract for a loan of barley carved in cuneiform. By the Metropolitan Museum of Art, Public domain. https://www.metmuseum.org/art/collection/search/321821
A page from the Liber Abaci. Public domain. https://en.wikipedia.org/wiki/Liber_Abaci#/media/File:Liber_abbaci_magliab_f124r.jpg
Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905. Public domain. https://en.wikipedia.org/wiki/Bank_of_England#/media/File:Bank_of_England_Charter_sealing_1694.jpg
A painting by the Flemish artist Andries van Eertvelt depicting ships returning from an early Dutch trading expedition to the East Indies in 1599, with the city of Amsterdam visible on the right. Public domain. https://commons.wikimedia.org/wiki/File:The_Return_to_Amsterdam_of_the_Second_Expedition_to_the_East_Indies_on_19_July_1599.jpg#/media/File:The_Return_to_Amsterdam_of_the_Second_Expedition_to_the_East_Indies_on_19_July_1599.jpg
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