168. Growth of credit business and of banking.—The rise of the joint stock companies was a great step in the development of the power of capital and of credit. Individual savings, which before might have been hoarded and made useless to society, were drawn from their hiding-places to form the capital and loans by which the great companies extended the scope of commerce in this period. Another step in advance, which deserves notice here, was the extension of banking north of the Alps. The medieval doctrine that it was wrong to take interest on loans lost its force when it appeared that loans were wanted by merchants who would put them to a good use; and society concluded that it was wise to encourage the lending of money by permitting the lender to take interest for it. There is a great difference, however, between the lending by an ordinary individual, who has more than he knows what to do with, and the business of lending as practised by a banker. The difference is this, that an ordinary individual lends his own money, while a banker lends that of somebody else. When credit operations have become sufficiently extensive the banker appears as a man who makes dealing in credit his profession. He steps in between the people who have capital but lack the ability or inclination to employ it profitably, and the people who have the ability and inclination to conduct business enterprises but lack the desirable amount of capital. The banker is a specialist in this profession, and by his special knowledge can do more than any one else could to collect the surplus capital and place it where it can be used to the best advantage.

169. Description of the rise of discount and deposit banking in England.—The history of banking is too large a topic to be considered here in detail. The early banks were marked by a number of individual peculiarities, and occupied often a public position as agents of the government; these points need not detain us. The development of ordinary commercial banking can be illustrated by the business of the London goldsmiths in the seventeenth century. The goldsmiths were required by the character of their stock to keep strong-boxes (“safes”), which served the purpose of a modern safe-deposit vault; and they united dealings in gold and silver coin with their original business. They were naturally the persons to whom a man would apply who wanted the means of keeping cash and other valuables more securely than was possible on his person or at his office or home; and thus they received in time considerable deposits from merchants and others. Probably they made some charge at first for the accommodation, but soon they were encouraging deposits by paying some interest, and by undertaking to perform services such as collection and remittance for their customers. They could afford to do this by reason of the fact that they did not let the cash lie idle in their vaults, but lent it to the government and to business men; they had become banks of discount and deposit. A tract published in 1676, entitled “The Mystery of the New fashioned Goldsmiths or Bankers,” gives this account of their operations. “Having thus got Money into their hands, they presumed upon some to come as fast as others was paid away, and upon that confidence of a running Cash (as they call it) they begun to accommodate men with moneys for Weeks and Moneths, upon extraordinary gratuities, and supply all necessitous Merchants that overtraded their Stock, with present Money for their Bills of Exchange, discounting sometimes double, perhaps treble interest for the time, as they found the Merchant more or less pinched.”

170. Rise of “money-power” as shown in the history of the Fugger family.—The reader will perhaps comprehend more clearly the great development of business in the modern period if we follow here the history of one of the families of South Germany which rose to the first rank among the money powers. The Fugger family was descended from a simple country weaver, who settled in Augsburg and died there in 1409. His sons rose to high place in the crafts of weavers and merchants, and accumulated wealth, like many others, by trade in spices, silks, and woolen cloth. Under a grandson, Jacob (1459-1526), who had been trained in Venice, the family business underwent a striking change. We should call Jacob a financier rather than a merchant. He and his brothers continued, it is true, to deal in merchandise, but they made their great profits by dealing in money and capital. If a prince or king wanted a loan they made it to him, charging a good round sum in commission and interest, gaining often a security for their advance, such as a mine or the right to collect some taxes, from which they could make good profit. If a king like Charles V, whose dominions were widely scattered, wanted to disburse some of his revenues in a distant province, they undertook to sell him the necessary exchange and avoided the transportation of the coin itself. Their business extended from Hungary and Poland in the East to Spain in the West, from Antwerp in the North to Naples in the South.

171. Description of the Fugger business.—The records of the Fugger firm have been preserved, and we can learn the extent and character of its business by the statement of its resources as they appeared in 1527. The figures are in florins, of which each had a purchasing power equal roughly to eight dollars to-day.

The reader will note the large sums appearing under mines and merchandise, showing that the Fuggers still maintained their dealings in wares, after they made finance their special business. The chief item, however, is that of loans, which included sums borrowed by the Pope, the Emperor, and kings of Europe. The Fuggers and other great financiers had immense influence on the politics of their time, for they could command money and credit while sovereigns were still trying in vain to build up an adequate revenue system. They made fabulous profits, over 50 per cent a year, in prosperous periods, and the Fuggers managed to make an average profit of over 30 per cent a year for over thirty years. In the case of most firms, however, there were lean years as well as fat ones, and the general average would be very much less. More striking than the rate of profit is the increase in the size of the capital. Taking two Italian banking firms, the Peruzzi about 1300, and the Medici about 1440, and comparing them with the Fuggers in 1546, we find that the capital was about as follows, expressed in modern purchasing power: Peruzzi, $800,000, Medici $7,500,000, Fuggers $40,000,000.

172. Weakness of the Fugger and other banking firms.—The great financial firms of the sixteenth century seem to have been premature. They lacked the permanence of the later joint stock companies, for they still retained the medieval form of a company based chiefly on family relationship, and required constant reorganization. Their success in the hazardous operations of the time depended entirely on the sagacity of the heads of the family, and as genius cannot be transmitted indefinitely they went to pieces ordinarily in the third generation from their establishment. The head of the Fugger firm about 1550 tried to wind up the business and withdraw the capital, but found it impossible to do this, and became involved in more and more enterprises. The balance of the firm in 1563 showed decided weakness; members of the family began to quarrel among themselves; and the firm finally lost in unfortunate loans practically all its accumulations. The bankruptcy of one of these firms involved wide-spread disaster, for as time went on they carried on their business less and less on the money contributed by members, and more and more on their credit. All classes in the community—nobles, burghers, peasants whose savings did not exceed ten florins, even servants—deposited their money at interest with the financiers, and were involved in their fall.

173. Description of business in Antwerp in the sixteenth century.—After considering the new forms of business from the standpoint of individual firms it will be profitable to study them in the city that was the business center of the time, where all the great firms were represented by agents. This city, in the first part of the sixteenth century, was Antwerp, which rose as the medieval port of Bruges declined. There have been, of course, greater cities and greater markets since that time, but never before or since, it is said, has the world seen such concentration of the trade of different peoples in a single place. The town owed its development almost entirely to the foreigners who flocked there to trade, and though it saw less of Italians and Hanseatics than Bruges had done, it was the one great gathering place for the Portuguese, Spanish, English, and German merchants who were now the leaders. It is said that over five hundred vessels sailed in or out of the port in one day, and that the English merchants alone employed over 20,000 persons in the city. The poet Daniel Rogiers said of the Antwerp exchange, “One heard there a confused murmur of all languages, one saw there a motley mixture of all possible costumes; in short the Antwerp bourse seemed to be a little world in which all parts of the great were united.” In contrast with Bruges, trade in Antwerp was almost entirely unrestricted, and this was perhaps the chief reason why the merchants of the time selected it as the place in which to develop the new forms of business.

174. Rise of the Antwerp exchange; its significance.—Antwerp presented in the sixteenth century the first case of a great bourse or exchange, that is, a place in which men meet daily and effect their exchanges without displaying and transferring the wares themselves, by the use of paper securities representing the wares. Such an institution cannot exist until the volume of trade is large enough to cause a steady and continuous flow of wares, in contrast to the spurts that marked the period of the fairs. It requires, moreover, that the objects dealt in be of such a kind that they can be represented at the exchange by some document or sample, so that the buyer can learn the quality of the ware without actually inspecting it. This is possible when a ware can be graded, put into a certain class the characteristics of which are so closely defined and so well known that the buyer needs only to decide whether he cares to take a certain quantity at a certain price.

175. Development of business on the exchanges; produce and money.—The use of the word “ware” in the foregoing description may suggest the produce exchange as the earliest and most important form of the exchange. Produce of various kinds, especially pepper, did form an object of exchange trade in Antwerp; and there was a considerable development of the produce exchange later in Amsterdam. At the “candle-auctions” on the Royal Exchange of London in the seventeenth century, goods were offered with an inch of lighted candle on the desk, and were knocked down before the candle went out; a single parcel of silk, indigo, or spice sold in this way was sometimes worth half a million dollars. The produce exchange, however, did not reach its full development until the nineteenth century, and we shall leave its significance in the commercial organization for later consideration.

The “ware” which formed the main object of trade on the Antwerp exchange was loanable capital, represented by various paper instruments. Princes who desired to borrow money, and who formerly would have applied to individual financiers like the Fuggers, turned to the exchange of Antwerp or of Lyons, where loanable capital from all over Europe was collected. Through the medium of the exchange a French king could and did borrow money of a Turkish pasha; and it was said that payments amounting to a million crowns were made in a single morning without the use of a penny of cash.

176. Advantages offered to industry and commerce by the exchanges.—Antwerp and Lyons had served especially political needs in their loans; they were embarrassed by the insolvency of royal debtors, and soon declined. Their place was taken by Amsterdam, London, Hamburg, Frankfort, and other cities, and with the rise of these new money centers a change of importance is to be noted. The new exchanges attracted capital for investment in private or semi-private economic undertakings, serving the needs of the new companies which were being established. Ordinary people with comparatively small savings would not have known (as they would not know now) where to invest their money if they had not had the stock exchange to turn to for an indication of enterprises seeking capital, and of the current price of the stock. The stock exchange was the natural and necessary accompaniment of the stock company.

Shares of trading and industrial companies and of public debts became the objects of a regular commerce, which was not confined by national boundaries, but which drew capital from all sources. When shares of the Dutch East India Company were put on the market in 1602 they were taken up to a considerable extent by capitalists of Antwerp who no longer had use for their money at home; much of the money needed to rebuild London after the fire of 1666, and a large part of the capital of the Bank of England, came from the Dutch; shares of the English companies trading with Asia and Africa circulated freely on the Amsterdam exchange; a loan to the German Emperor was floated in London.

177. Growth of speculation; early abuses.—Modern forms of speculative business grew up with the exchanges. A pamphlet published as early as 1542 described the “monstrous thing” that Antwerp merchants had devised; they bet with each other on the course of foreign exchange, one saying it would be 2 per cent, one 3 per cent, etc., and afterwards they settled by paying the differences. This is substantially the same operation as that which is carried on regularly to-day. When the trade in shares of stock was established traders would speculate on a rise or a fall, or a combination of both. Shrewd speculators organized a system of news gathering and forwarding which gave them the first knowledge of important events affecting the price of securities, and enabled them to anticipate the turn of the market. London speculators got word through a private channel of the signing of the treaty of Rijswijk in 1697, a day before the English ambassador arrived with the official announcement; their eagerness to buy bank stock aroused suspicion, and the reason for their purchase appeared when the news was published and the price of the stock rose from 84 to 97.

Underhanded methods of trade were common. Speculators would set afloat rumors to depress the price of securities, and then buy in. One day during the reign of Anne in England a well-dressed man rode furiously through the street proclaiming the death of the Queen. The news spread and the funds fell; the Jew interest on the exchange bought eagerly, and were suspected later of being responsible for the hoax, though it was not proved against them. The Englishman, Child, who made a fortune in speculation, and who was called in a pamphlet of 1719 “the original of stock-jobbing,” would have one set of brokers spread rumors of disaster, and sell a little of his stock publicly, while another set bought for him “with privacy and caution”; in a few weeks he would reverse the process and come out ten or twenty per cent ahead.

178. Dangers of the new system of business; promotion of unprofitable enterprises.—The appeal of joint stock companies to the public through the medium of the stock exchange proved to be so effective in gathering capital that a great many worthless undertakings were floated. When times were good, that is, when enterprises had proved successful, when people had saved money for investment and looked with confidence to the future, almost anything in the shape of a company could get subscribers to its stock. The reader should note that there were two sides, one good and one bad, to the new methods by which commerce was being developed. The facility of getting capital from a great number of subscribers made possible more and larger undertakings than had been known before, and was an unmixed benefit when the new undertakings were devised to fill a real need of society. There was, however, a separation before unknown between the subscriber and the undertaking; the contributor of capital might be entirely ignorant of the economic basis of the enterprise, and might sink his money for a return which came late or not at all. There was thus a chance for the diversion of the capital of society to worthless purposes; the business organization had become more powerful, but at the same time more delicate and subject to derangement. We find in this period the beginning of commercial crises marked by the misdirection of invested capital, disappointment of investors, and distrust and lethargy, until spirits rose with the recovery of lost ground, and good times began again.

179. Description of the “Bubble Period” in England.—Commercial crises occurred in all of the advanced countries during this period. We shall not, however, attempt an enumeration of them here, but shall use the available space for a description of the most important crisis, that which affected both England and France about 1720.

The crisis in England was closely connected with the course of the South Sea Company, which had been established in 1711 as a trading corporation. The company had secured the right to export slaves to the Spanish colonies, had developed a promising whale-fishery, and was thought to be a large and flourishing concern. It was then transformed into a financial company, with the bold plan of assuming the whole national debt, for which it made extravagant offers. “The large sum offered by the company, which made success impossible, stimulated the imaginations of the people, who fancied that a privilege so dearly purchased must be of inestimable value, and the complication of credulity and dishonesty, of ignorance and avarice, threw England into what it is scarcely an exaggeration to term a positive frenzy.”

All classes rushed to buy the stock, which at one time was quoted at 1,000. Then the weakness of the scheme became apparent; the stock fell as rapidly as it had risen, and investors or speculators were ruined in large numbers. This was only one of the bubbles which were inflated and which burst about this time. Other companies were promoted for making salt water fresh, for extracting silver from lead, for trading in human hair, and for a wheel of perpetual motion. Insurance was now coming into prominence, and this offered a favorite field for promoters. Subscriptions were received for companies that proposed to insure against losses of servants, against burglars and against highwaymen; one scheme was “Plummer and Petty’s Insurance from Death by drinking Geneva” (gin). We get a vivid idea of the spirit of the period from the fact that one promoter, who announced a company “for an undertaking which shall in due time be revealed,” secured 2,000 guineas in a single morning, with which he immediately made off.

180. The crisis of the Company of the Indies in France.—Just before the time of the English crisis one curiously similar in character occurred in France. A Scotchman, John Law, who was an able banker and financier, promoted a Company of the West, expanded later into the Company of the Indies, which united with its commercial projects an attempt to finance the government. Extravagant ideas were formed of the possibilities of Law’s “system,” and the roads to Paris were blocked by people hurrying there to speculate in shares. Two of the ablest scholars in France deplored the madness at one interview, and at the next found themselves bidding against each other. Coachmen, cooks, and waiters became millionaires by lucky speculation; tradespeople in the street where the exchange was established made fortunes by letting out their stalls and chairs. The price of stock rose until it frightened even the promoter of the system, who interfered in the hope of checking speculation, but who found soon that he was unable to check either the rise or the fall of the stock. The crash which quickly followed was especially serious, as the whole currency consisted now of discredited notes issued by the company. Ruin was widespread, and credit received a blow which made the promotion of legitimate enterprises difficult for a long time thereafter.

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