Introduction

A character in Shakespeare’s play Hamlet once told his son: “Neither a borrower nor a lender be.” His words suggested that lending money was immoral. But if you look at the history of the world in Era 5 (when Hamlet was written), lending money was actually very common. Loans were part of a broader pattern of economic change that completely reshaped global production and distribution. These changes formed new networks, a middle class, and also contributed to the rise of nation-states and capitalism.

Innovations in finance

First, let’s define credit. Credit is an agreement between a borrower and a lender that a loan will be repaid later. In many cases, the agreement includes interest, which is what the borrower must repay in addition to the value of the loan. There is evidence that humans were using credit and interest as early as 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. Other groups, who were often excluded from business opportunities and many professions, tended to be the only ones who charged interest. Many of these money-lenders were Jews, who faced increased discrimination for their work.

Fibonacci’s Liber Abaci

Europeans also didn’t know how to use these 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, where he learned about new mathematical concepts. His book introduced Europe to fractions and decimals as well as the Hindu-Arabic numeral system (1,2,3, etc.), which 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 also helped solve other economic problems, like putting a price on products and calculating profits and interest rates.

The first modern banks

Fibonacci’s ideas helped business boom in Venice and Florence, Italy. These cities were part of large trade networks, and where the first banks opened. Today, banks are normal, but a few hundred years ago the concept of a place for managing money was brand new.

Banks developed new ways to deal with money, such as the bill of exchange or promissory note. A buyer would give a seller a bill of exchange, which the seller would take to the bank in order to receive their money. Bills of exchange helped people give money to each other without exchanging cash. If they sound familiar, it’s because they’re related to modern-day checks.

International currency exchange

For a while, the Mediterranean was a banking hotspot. But power eventually shifted from the Mediterranean 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, because now you could move money without having to use coins or bills of exchange.

Bonds

Around this time, banks grew in importance. There were even banks that dealt with the government’s money. Some countries paid for wars with bonds, which was when individuals lent money to the government through a bank. The government promised to pay back the loan plus interest at a later date.

Colonialism and the rise of joint-stock companies

These financial technologies changed the way nations dealt with trade and starting colonies. International trade could bring great profits. However, it was expensive to send a fleet of ships across the ocean. Few individuals were willing to take the risk on their own.

Joint-stock companies helped lower the risk. Joint-stock companies were owned by several individuals who split business costs and shared the profits. Of course, the business could still fail. But joint-stock companies made it so a few people could lose some 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 such as Song Dynasty China around 1000 CE. They were also around in a different form in the Muslim world. But in the sixteenth and seventeenth centuries, the joint- stock model really took off in Europe.

Colonizing projects were often paid for by joint-stock companies instead of governments. Join-stock companies like 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 where governments controlled that trade. The goal is to sell more than you buy to make your country wealthier and more self-sufficient.

At that time, European demand for foreign goods was growing. However, it was expensive to import those goods from other countries. Mercantilism increased interest in forming colonies for a couple reasons. First, the colonies had all the materials needed to make the stuff people wanted to buy. Second, they were 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

Business was booming, at least for Europeans. In a world that used to be just a few rich people and a whole lot of poor people, middle classes began to emerge. This had a lot to do with the rise of the merchant class, which was able to make money through trade. This wealth made the middle classes more powerful, but they still wanted more political power. All of this led to a new social and political environment during the seventeenth and early eighteenth centuries.

Capitalism and the free market

Around that time, a new economic system started to emerge: capitalism. Capitalism is a system in which a country’s businesses are controlled by private companies instead of the government or workers. Eventually, some European governments allowed private companies to buy and sell without too much government involvement. Joint- stock companies and individuals began hiring wage laborers, who had to sell their labor in addition to using their own tools and farms. Capitalists made huge profits, but they did not have to share that profit with their workers.

Conclusion

The effects of these changes were huge. Credit grew in Era 5, while joint-stock companies directly caused colonies to expand. The other big changes were production and distribution. Goods were being produced in the European colonies, but they were being sold in both Europe and the colonies. The flow of goods created new nations with distinct social classes. Europeans adopted capitalism, which would completely change production and distribution around the world.