An Austrian Perspective on the History of Economic Thought
3. From Middle Ages to Renaissance
3.1 The great depression of the fourteenth century
3.2 Absolutism and nominalism: the break-up of Thomism
3.3 Utility and money: Buridan and Oresme
3.4 The odd man out: Heinrich von Langenstein
3.5 Usury and foreign exchange in the fourteenth century
3.6 The worldly ascetic: San Bernardino of Siena
3.7 The disciple: Sant’Antonino of Florence
3.8 The Swabian liberals and the assault on the prohibition of usury
3.9 Nominalists and active natural rights
3.10 Notes
3.1 The great depression of the fourteenth century
Most people – historians not excepted – are tempted to think of economic and cultural progress as being continuous: in every century people are better off than in the one preceding. This comforting assumption had to be given up quite early when the Dark Ages ensued after the collapse of the Roman Empire. But it was generally held that after the ‘renaissance’ of the eleventh century, progress in western Europe was pretty well linear and continuous from that point to the present day. It took heroic efforts over many decades for economic historians like Professors Armando Sapori and Robert Sabatino Lopez to finally convince the historical profession that there was a grave secular decline in most of western Europe from approximately 1300 to the middle of the fifteenth century; a period which might be called the Late Middle Ages or the Early Renaissance. This secular decline, mistitled a ‘depression’, permeated most parts of western Europe with the exception of a few Italian city-states.
The economic decline was marked by a severe drop in population. Since the eleventh century, economic growth and prosperity had pulled up population figures. Total population in western Europe, estimated at 24 million in the year 1000 AD, had vaulted to 54 million by the year 1340. In little over a century, from 1340 to 1450, however, the western European population fell from 54 million to 37 million, a 31 per cent drop in only a century.
The successful battle to establish the fact of the great decline has done little, however, to establish the cause or causes of this debacle. Focus on the devastation caused by outbreaks of the Black Death in the mid-fourteenth century is partially correct, but superficial, for these outbreaks were themselves partly caused by an economic breakdown and fall in living standards which began earlier in the century. The causes of the great depression of western Europe can be summed up in one stark phrase: the newly imposed domination of the state. During the medieval synthesis of the High Middle Ages there was a balance between the power of Church and state, with the Church slightly more powerful. In the fourteenth century that balance was broken, and the nation-state came to hold sway, breaking the power of the Church, taxing, regulating, controlling and wreaking devastation through virtually continuous war for over a century (the Hundred Years’ War, from 1337 to 1453).1
The first and critically most important step in the rise in the power of the state at the expense of crippling the economy was the destruction of the fairs of Champagne. During the High Middle Ages, the fairs of Champagne were the main mart for international trade, and the hub of local and international commerce. These fairs had been carefully nurtured by being made free zones, untaxed or unregulated by the French kings or nobles, while justice was swiftly and efficiently meted out by competing private and merchants’ courts. The fairs of Champagne reached their peak during the thirteenth century, and provided the centre for land-based trade over the Alps from northern Italy, bearing goods from afar.
Then, in the early fourteenth century, Philip IV, the Fair, king of France (1285–1314), moved to tax, plunder, and effectively destroy the vitally important fairs of Champagne. To finance his perpetual dynastic wars, Philip levied a stiff sales tax on the Champagne fairs. He also destroyed domestic capital and finance by repeated confiscatory levies on groups or organizations with money. In 1308, he destroyed the wealthy Order of the Templars, confiscating their funds for the royal treasury. Philip then turned to impose a series of crippling levies and confiscations on Jews and northern Italians (‘Lombards’) prominent at the fairs: in 1306, 1311, 1315, 1320 and 1321. Furthermore, at war with the Flemings, Philip broke the long-time custom that all merchants were welcome at the fairs, and decreed the exclusion of the Flemings. The result of these measures was a rapid and permanent decline of the fairs of Champagne and of the trading route over the Alps. Desperately, the Italian city-states began to reconstitute trade routes and sail around the Straits of Gibraltar to Bruges, which began to flourish even though the rest of Flanders was in decay.
It was particularly fateful that Philip the Fair inaugurated the system of regular taxation in France. Before then, there were no regular taxes. In the medieval era, while the king was supposed to be all-powerful in his own sphere, that sphere was restricted by the sanctity of private property. The king was supposed to be an armed enforcer and upholder of the law, and his revenues were supposed to derive from rents on royal lands, feudal dues and tolls. There was nothing that we would call regular taxation. In an emergency, such as an invasion or the launching of a crusade, the prince, in addition to invoking the feudal duty of fighting on his behalf, might ask his vassals for a subsidy; but that aid would be requested rather than ordered, and be limited in duration to the emergency period.
The perpetual wars of the fourteenth and the first half of the fifteenth centuries began in the 1290s, when Philip the Fair, taking advantage of King Edward I of England’s war with Scotland and Wales, seized the province of Gascony from England. This launched a continuing warfare between England and Flanders on the one side, and France on the other, and led to a desperate need for funds by both the English and the French Crowns.
The merchants and capitalists at the fairs of Champagne might have money, but the largest and most tempting source for royal plunder was the Catholic Church. Both the English and French monarchs proceeded to tax the Church, which brought them into a collision course with the pope. Pope Boniface VIII (1294–1303) stoutly resisted this new form of pillage, and prohibited the monarchs from taxing the Church. King Edward reacted by denying justice in the royal courts to the Church, while Philip was more militant by prohibiting the transfer of Church revenue from France to Rome. Boniface was forced to retreat and to allow the tax, but his bull Unam Sanctam (1302) insisted that temporal authority must be subordinate to the spiritual. That was enough for Philip, who boldly seized the pope in Italy and prepared to try him for heresy, a trial only cut off by the death of the aged Boniface. At this point Philip the Fair seized the papacy itself, and brought the seat of the Roman Catholic Church from Rome to Avignon, where he proceeded to designate the pope himself. For virtually the entire fourteenth century, the pope, in his ‘Babylonian captivity’, was an abject tool of the French king; the pope only returned to Italy in the early fifteenth century.
In this way, the once mighty Catholic Church, dominant power and spiritual authority during the High Middle Ages, had been brought low and made a virtual vassal of the royal plunderer of France.
The decline of Church authority, then, was matched by the rise in the power of the absolute state. Not content with confiscating, plundering, taxing, crushing the fairs of Champagne, and bringing the Catholic Church under his heel, Philip the Fair also obtained revenue for his eternal wars by debasement of the coinage and thereby generated a secular inflation.
The wars of the fourteenth century did not cause a great deal of direct devastation: armies were small and hostilities were intermittent. The main devastation came from the heavy taxes and from the monetary inflation and borrowing to finance the eternal royal adventures. The enormous increase of taxation was the most crippling aspect of the wars. The expenses of war: recruitment of the modestly sized army; payments of its wages; supplies; and fortifications – all cost from two- to fourfold the ordinary expenses of the Crown. Add to that the high costs of tax assessment and enforcement and the cost of the loans, and the crippling burden of war taxation becomes all too clear.
The new taxes were everywhere. We have seen the grave effect of taxes on the Church; on a large monastic farm, they often absorbed over 40 per cent of the net profits of the farm. A uniform poll tax of one shilling, levied by the English Crown in 1380, inflicted great hardship on peasants and craftsmen. The tax amounted to one month’s wages for agricultural workers and one week’s wages for urban labourers; moreover, since many poor workers and peasants were paid in kind rather than money, amassing the money to pay the tax was particularly difficult.
Other new taxes levied were ad valorem on all transactions; taxes on wholesale and retail beverages; and levies on salt and wool. To combat evasion of the tax, the governments established monopoly markets for the sale of salt in France and ‘staple points’ for English wool. The taxes restricted supply and raised prices, crippling the critical English wool trade. Production and trade were hampered further by massive requisitions levied by the kings, thus causing a drastic fall of income and wealth, as well as bankruptcies among the producers. In short, consumers suffered from artificially high prices and producers from low returns, with the king bleeding the economy of the differential. Government borrowing was scarcely more helpful, leading to repeated defaults by the kings and consequent heavy losses and bankruptcies among the private bankers unwise enough to lend to the government.
Originating as a response to wartime ‘emergency’, the new taxes tended to become permanent: not only because the warfare lasted for over a century, but because the state, always on the lookout for an increase in its income and power, seized upon the golden opportunity to convert wartime taxes into a permanent part of the national heritage.
From the middle to the end of the fourteenth century, Europe was struck with the devastating pandemic of the Black Death – the bubonic plague – which in the short span of 1348–50 wiped out fully one-third of the population. The Black Death was largely the consequence of people’s lowered living standards caused by the great depression and the resulting loss of resistance to disease. The plague continued to recur, though not in such virulent form, in every decade of the century.
Such are the great recuperative powers of the human race that this enormous tragedy caused virtually no lasting catastrophic social or psychological effects among the European population. In a sense, the longest-lasting ill effect from the Black Death was the response of the English Crown in imposing permanent maximum wage control and compulsory labour rationing upon English society. The sudden decline of population and consequent doubling of wage rates was met by the government’s severe imposition of maximum wage control in the Ordinance of 1349 and the Statue of Labourers of 1351. Maximum wage control was established at the behest of the employing classes: large, middle and small landlords, and master craftsmen, the former groups in particular alarmed at the rise of agricultural wage rates. The ordinance and the statute defied economic law by attempting to enforce maximum wage control at the old pre-plague levels. The inevitable result, however, was a grave shortage of labour, since at the statutory maximum wage the demand for labour was enormously greater than the newly scarce supply.
Every government intervention creates new problems in the course of vain attempts to solve the old. The government is then confronted with the choice: pile on new interventions to solve the inexplicable new problems, or repeal the original intervention. Government’s instinct, of course, is to maximize its wealth and power by adding new interventions. So did the English Statute of Labourers, which imposed forced labour at the old wage rates for all men in England under the age of 60; restricted the mobility of labour, declaring that the lord of a particular territory had first claim on a man’s labour; and made it a criminal offence for an employer to hire a worker who had left a former master. In that way, the English government engaged in labour rationing to try to freeze labourers at their pre-plague occupations at pre-plague wages.
This forced rationing of labour cut against the natural inclination of men to leave for more employment at better wages, and so the inevitable rise of black markets for labour made enforcement of the statutes difficult. The desperate English Crown tried once again, in the Cambridge Statute of 1388, to make the rationing more rigorous. Labour mobility of any sort was prohibited without written permission from local justices, and compulsory child labour was imposed in agriculture. But there was continual evasion of this compulsory buyers’ cartel, especially by large employers, who were particularly eager and able to pay higher wage rates. The cumbersome English judicial machinery was totally ineffective in enforcing the legislation, although the monopolistic urban guilds (monopolies enforced by government) were able to partially enforce wage control in the cities.
3.2 Absolutism and nominalism: the break-up of Thomism
Along with the rise of the absolute state, theories of absolutism arose and began to throw natural law doctrines into the shade. The adoption of natural law theory, after all, meant that the state was bound to limit itself to the dictates of the natural or the divine law. But new political theorists arose, asserting the dominance of the temporal over the spiritual, and of the state’s positive law over the natural or divine order. The first and most influential of such late medieval champions of absolutism was Marsiglio of Padua (c.1275– 1342), in his famous Defensor Pacis (Defence of the peace) (1324). The son of a Paduan lawyer, Marsiglio rose to become rector of the University of Paris. The state, opined Marsiglio, is supreme and must be obeyed in and for itself. This glorification of the state went hand in hand with a denial that human reason could come to know any natural law outside of positive edicts of the state. For Marsiglio, reason had to be separated from justice or human society. Justice has no rational foundation; it is purely mystical and solely a matter of faith. God’s commands are purely arbitrary and mysterious, and not to be understood in terms of rational or ethical content.
As a corollary, positive law has nothing to do with right reason; it is promulgated to advance the ‘life and health of the state’. According to Marsiglio, the nation is an organism, with the state functioning as its head. As Professor Rothkrug writes, ‘Marsiglio says the state is a living organism not subject to reason because, like a plant, it develops in accord with inborn impulses’.2
The practical conclusion Marsiglio derived from his political philosophy is that the state, whether kingdom or Italian city-republic, must have absolute power within its domain, and must not be subject to any temporal check or jurisdiction by the Church. Thus, while religiously a Catholic, Marsiglio anticipated the politiques in France and elsewhere two centuries later by insisting that the Church may have no temporal power as against the state. Marsiglio thereby foreshadowed and helped to bring about the break-up of the medieval order in Europe.
Also destructive of the achievements of the High Middle Ages was the ideological break-up of Thomism ushered in by the fourteenth century. This decline emerged out of Franciscan fideism, begun by St Thomas’s great English rival John Duns Scotus. It used to be thought that this destruction was brought to a logical conclusion by the fourteenth century Franciscan Oxford philosopher William of Ockham (c. 1290–1350). Ockhamite nominalism, it has been held, denied the power of human reason to arrive at the essential truths about man and the universe, and therefore negated the power of reason to arrive at a systematic ethic for man. Only God’s will, discernible by faith in revelation, could yield truths, laws, or ethics. It should be clear that nominalism paved the way for modern scepticism and positivism, for if faith in divine will is abandoned, reason no longer has the power to arrive at scientific or ethical truths. Politically, nominalism failed to provide a natural law standard to set against the state, and it therefore fitted with the growing state absolutism of the Renaissance.
Recent scholarship, however, casts grave doubt on whether Ockham and his followers were really nominalists or were rather essentialists and believers in natural law. Thus, it turns out that the eminent Augustinian contemporary of Ockham, the Italian Gregory of Rimini (d.1358) was not really a nominalist but a staunch champion of essentialism, reason and natural law. In contrast to the usual view of Ockham and his followers, Gregory held that natural law comes not from God’s will but from the dictates of right reason, and he even went further towards an all-out rationalist position generally thought to have been invented three centuries later by the Dutch Protestant philosopher and jurist Hugo Grotius. This position held that, even if God did not exist, the system of natural law would be given to us by the dictates of right reason, the violation of which would still be a sin. Thus, as Gregory put it: ‘If, per impossibile, the divine reason, or God himself did not exist, or that that reason were mistaken, still if one were to act against right reason, angelic, human or any other if such there be, he would sin’.
3.3 Utility and money: Buridan and Oresme
Being a Franciscan and a student of William of Ockham did not prevent the great French philosopher–scientist Jean Buridan de Bethune (1300–58), born in Picardy, to become rector of the University of Paris, from making the next important contribution to economic thought in the essentialist Thomist tradition. In his Quaestiones, a thorough commentary on Aristotle’s Ethics, Buridan continued the Aristotle–Thomas analysis of the exchange value of goods being determined by consumer need or utility. But Buridan also pressed on to point out that a house would never exchange for one garment, since the builder would have to forego a year’s worth of food for a much less valuable good. In short, Buridan was groping towards an opportunity-cost concept of cost of production and influence on supply.
More importantly, Buridan advanced beyond the initiative of Richard of Middleton in analysing the mutual benefit that each party necessarily derives from an exchange. In discussing exchange, Buridan notes that both parties benefit, and that trade is not, as many people believe, a type of warfare in which one party benefits at the expense of another. Furthermore, Buridan proceeds to a sophisticated analysis in which he dramatically shows that two parties to a two-good exchange can both benefit even if the exchange is itself immoral and is to be condemned on ethical or theological grounds. Thus Buridan poses the rather provocative hypothetical:
Because Socrates gave his wife willingly and with her consent to Plato to commit adultery in exchange for ten books, which one of them suffered a loss and which one gained? ... Both suffered injury as far as their soul was concerned...[but] with regard to the external good, each gained since he has more than he needs.
For Buridan as for most other scholastics, the just price was the market price. Buridan also provided a sophisticated analysis of how common human need and utility resulted in market prices. The greater the need and hence the greater the demand, the greater the value; also, a reduction in the supply of a product will cause its price on the market to rise. Furthermore, a good is more expensive where it is not produced than where it is, since there is a greater demand for it in the former place; again, the marginal concept is all that is needed to complete the analysis of demand, supply and price. There are also intimations in Buridan of different valuations by market participants resulting in a single price, with varying consumer and producer psychic surpluses for each participant.
But the main great leap forward in economics contributed by Jean Buridan was his virtual creation of the modern theory of money. Aristotle had analysed the advantages of money, and its overcoming of the double-coincidence-of-wants problem of barter, but his outlook was clouded by his fundamental hostility to trade and money-making. To Aristotle, therefore, money was not natural but an artificial convention, and therefore basically a creature of the state or polis. Aquinas’s theory of money was basically confined within the Aristotelian shackles. It was Jean Buridan who broke free of those shackles and founded the ‘metallist’ or commodity theory of money, i.e. that money originates naturally as a useful commodity on the market, and that the market will pick the medium of exchange, almost always a metal if available, possessing the best qualities to serve as a money.
Money then, for Buridan, is a market commodity, and the value of that money, just as in the case of other market commodities, ‘must be measured by human need’. Just as the values of exchangeable goods ‘are proportionate to human need, so they will be proportionate to money, itself proportionate to human need’. Thus, Buridan remarkably set the agenda for determining the value or price of money, on the same principles of utility that determine the market prices of goods: an agenda which would only be fulfilled six centuries later in 1912 by the Austrian Ludwig von Mises, in his Theory of Money and Credit.
Foreshadowing the Austrians Menger and von Mises, Buridan insisted that an effectively functioning money must be composed of a material possessing a value independent of its role as money, i.e. it must consist of a market commodity originally useful for non-monetary purposes. Buridan then went on to catalogue those qualities that lead the market to choose a commodity as a medium of exchange or money, such as portability, high value per unit weight, divisibility and durability – qualities possessed most strikingly by the precious metals gold and silver. In that way, Buridan began the classification of monetary qualities of commodities which was to constitute the first chapter of countless money and banking textbooks down to the end of the gold standard era in the 1930s.
Thus, not only did Jean Buridan found the theory of money as a market phenomenon; he thereby took money out of the mystique of being solely a creation of the state, and put it on a par with other goods as a product of the marketplace.
A not very happy modern spin-off of Buridan’s theory of volition emerged in the 1930s as part of the indifference curve analysis. Buridan postulated a perfectly rational ass who found himself equidistant between two equally attractive bundles of hay. Indifferent between the two choices and therefore unable to choose, the perfectly rational ass could choose neither and thereby starved to death. What this example overlooked is that there is a third choice, which presumably the ass liked the least: starving to death. So that it was therefore ‘perfectly rational’ not to starve to death but rather to choose one of the two bundles even at random (and then to proceed to the second bundle).3 Until recent years, conventional texts on the history of economic thought, if they dealt with anyone at all before the mercantilists or Adam Smith, briefly mentioned only two people: St Thomas Aquinas and Nicole Oresme (1325–82). Although Oresme, a noted French mathematician, astronomer and physicist, was one of the most important European intellectuals of the fourteenth century, his contributions to economic thought scarcely deserve such exclusive attention. Oresme was a pupil and follower of Jean Buridan, a scholastic commenting on Aristotle and teaching in his turn at the University of Paris and going on to become bishop of Lisieux. Oresme was moved to write his well-known booklet, A Treatise on the Origin, Nature, Law and Alterations of Money, in the 1350s, applying the teachings of his hard-money mentor to the rash of monetary debasements indulged in by the kings of France in the first half of the fourteenth century. In the centuries before paper money and central banking were founded in the late seventeenth century, the only way in which kings could gain revenue through monetary manipulation was by debasement – changing the definition of the money unit by lightening its weight in terms of the basic money, gold or silver. If, for example, the money unit had been defined as 10 ounces of silver, the government could use its monopoly of the coinage to redefine the money unit as 9 silver ounces, and then pocket the difference in the course of recoinage. The extra ounces would be employed to mint new coins for the king to use in wars, for the building of palaces, and for other allegedly worthy causes.
The British currency unit, the pound sterling, got its name centuries ago by originally being defined as simply one pound of silver. The process of debasement in Britain has proceeded so far that the ‘pound’ is now equal to less than ¼ a silver ounce.
Before the advent of paper money and central banking, then, debasement was the only process by which the ruler could alter the currency to create a greater supply of money (in terms of the money unit), and thereby cause price inflation. The king was able to use his compulsory monopoly of the coinage to manipulate repeated debasements for his own gain at the expense of the rest of the public.
Oresme’s most important contribution to monetary theory was to enunciate clearly, for the first time, what came to be known as ‘Gresham’s law’, that is, the insight that if two or more moneys are legally fixed in relative value by the government, then the money overvalued by the government will drive the undervalued money out of circulation. Thus if the government decrees that, say, 1 ounce of gold is legally worth 10 ounces of silver, whereas on the free market it is worth 15, the people will stick their creditors and vendors with the legally overvalued money (silver–the ‘bad’ money) while they hoard the undervalued (gold – the ‘good’ money) or export it out of the country where it can be sold at its market value. Gresham’s law has often been boiled down in common parlance into: ‘bad money drives out good’, but stated that way it is paradoxical and unsatisfying. For it implies that while in all other market products the good will outcompete the bad, there is some deep flaw in the free market that causes it to prefer good money to bad. But as Ludwig von Mises clarified in the early twentieth century, Gresham’s law is the product not of the free market but of government monetary control. Its fixing of relative money value is a special case of the general consequence of any price control, i.e. shortage of a good in which maximum prices are imposed, and a ‘surplus’ where a minimum price is enforced. In the case of money, in our example, gold suffers a maximum price control and therefore a shortage, while the value of silver is kept up artificially and therefore goes into surplus relative to gold.
The first formulation of Gresham’s law was that of the satiric ancient Greek playwright, Aristophanes, who, in The Frogs, states characteristically: ‘In our Republic bad citizens are preferred to good, just as bad money circulates while good money disappears’.4 Oresme, however, put the law in a cogent and correct manner, emphasizing that the monetary disruption is a function of government price-fixing: ‘if the fixed legal ratio of the coins differs from the market value of the metals, the coin which is underrated entirely disappears from circulation, and the coin which is overrated alone remains current’.
In his Treatise, Nicole Oresme was moved to apply his mentor Buridan’s metallist monetary theory to attack the debasement policy of the French kings. Oresme did not go so far as to denounce the king’s coinage monopoly per se, but he did accomplish the feat of taking the whole matter out of the kings’ carefully propounded mystique of ‘sovereignty’, converting the entire coinage question to a matter of practical convenience. Since the king was not entitled to cloak coinage in the mystique of royal prerogative and absolute royal will, he was duty-bound to govern according to the best interests of the community. He is therefore obliged to maintain the standards of weight and of coinage; frequent alterations in such standards ‘destroy respect and breed “scandal and murmuring among the people and risk of disobedience’”. The definition of the currency unit should therefore be a fixed ordinance. Frequent alterations and debasements, Oresme pointed out, will cause money and coins to lose their character as measures of value; and internal and external trade will be crippled. Foreign merchants will be repelled, since they will no longer have good, safe money to work with, while domestic traders will no longer have any firm means of communication. Money could no longer be loaned out safely, and there would be no way of correctly valuing money incomes.
Furthermore, since debased money will have a lower value at home, gold or silver will be sent abroad where they will now have a higher market value. Thus Oresme was perhaps the first to point out that money will tend to flow to those areas and countries where its value is highest, and to leave those countries where its value is lowest.
Nicole Oresme had no illusions about the reasons for the kings’ repeated debasements. As Oresme put it: if the king ‘should tell the tyrant’s usual lie that he applies the profit from debasement to the public advantage, he must not be believed, because he might as well take my coat and say he needed it for the public service’.
Oresme also adds to Buridan’s analysis of how commodities become money on the market: he stresses easy portability, and that it should be of high value per unit weight. He also points out that after a period of gold or silver being weighed out in precise quantities for each transaction, people started to coin the precious metals, with an inscription and a head on the coin to guarantee a certain quantity of gold or silver in each coin. Gold, being a more valuable money, will generally be used for larger transactions, while silver and even copper may be used for smaller purchases.
3.4 The odd man out: Heinrich von Langenstein
One nominalist and student of Buridan, Heinrich von Langenstein the Elder (also known as Henry of Hesse) (1325–97), while an uninfluential and minor scholastic philosopher in his own and later centuries, made great mischief for modern interpretations of the history of economic thought. Langenstein, who taught first at the University of Paris and then at Vienna, began in his Treatise on Contracts by analysing the just price in the mainstream scholastic manner: just price is the market price, which is a rough measure of the human needs of consumers. This price will be the outcome of individuals’ calculations about their wants and values, and these in turn will be affected by the relative lack or abundance of supply, as well as by the scarcity or abundance of buyers.
Having said this, Langenstein proceeded to contradict himself completely. In a highly unfortunate contribution to the history of economic thought, Langenstein urged local government authorities to step in and fix prices. Price-fixing would somehow be a better path to the just price than the interplay of the market. Other scholastics had not exactly opposed price-fixing; for them, the market price was just whether it was set by the common estimate of the market or by the government. But it was at least implicit in their writings that the free market was a better (or at the very least an equally good) path to discovering the just price. Langenstein was unique in positively advocating government price-fixing.
Moreover, Langenstein added another economic heresy. He counselled the authorities to fix the price so that each seller, whether merchant or craftsman, could maintain his status or station in life in the society. The just price was the price which maintained everyone’s position in the style to which he had become accustomed – no more and no less. If a seller tried to charge a price to advance beyond his station, he was guilty of the sin of avarice.
Langenstein was the odd man out among the scholastics and late medieval thinkers. No one has been found to second the ‘station in life’ concept of the just price. Indeed St Thomas Aquinas himself effectively demolished this view when he trenchantly declared
In a just exchange the medium does not vary with the social position of the persons involved, but only with regard to the quantity of the goods. For instance, whoever buys a thing must pay what the thing is worth whether he buys from a pauper or a rich man.
In short, on the market prices are the same to all, rich or poor, and furthermore this is a just method of establishing prices. In the bizarre Langenstein view, of course, a wealthy seller of the same product would be obliged to sell it for a far higher price than a poor seller, in which case it is unlikely that the wealthy man would last long in the business.
As far as can be determined, no medieval or renaissance thinker adopted the station in life theory, and only two followers adopted the price-fixing position. One was Matthew of Cracow (c. 1335–1410), professor of theology at Prague and later rector at the University of Heidelberg and archbishop of Worms, and particularly Jean de Gerson (1363–1429), nominalist and French mystic who was chancellor of the University of Paris. Gerson, however, ignored the station in life notion and reverted to the thirteenth century view of John Duns Scotus that the just price is the cost of production plus compensation for labour and risk incurred by the supplier. Gerson therefore urged that the government fix prices to force them to conform to the allegedly just price. Indeed, Gerson was a fanatic on price-fixing, advocating that it be extended from its customary sphere in wheat, bread, meat, wine and beer, to embrace all commodities whatsoever. Fortunately, Gerson’s view also had little influence.
Von Langenstein was scarcely important in his own or at a later day; his great importance is solely that he was plucked out of well-deserved obscurity by late nineteenth century socialist and state corporatist historians, who used his station in life fatuity to conjure up a totally distorted vision of the Catholic Middle Ages. That era, so the myth ran, was solely governed by the view that each man can only charge the just price to maintain him in his presumably divinely appointed station in life. In that way, these historians glorified a non-existent society of status in which each person and group found himself in a harmonious hierarchical structure, undisturbed by market relations or capitalist greed. This nonsensical view of the Middle Ages and of scholastic doctrine was first propounded by German socialist and state corporatist historians Wilhelm Roscher and Werner Sombart in the late nineteenth century, and it was then seized upon by such influential writers as the Anglican Socialist Richard Henry Tawney and the Catholic corporatist scholar and politician Amintore Fanfani. Finally, this view, based only on the doctrines of one obscure and heterodox scholastic, was enshrined in conventional histories of economic thought, where it was seconded by the free market but fanatically anti-Catholic economist Frank Knight and his followers in the now highly influential Chicago School.
The much-needed corrective to the older view has at last become dominant since World War II, led by the enormous prestige of Joseph Schumpeter and by the definitive research of Raymond de Roover.
3.5 Usury and foreign exchange in the fourteenth century
The charging of interest on a loan continued to be condemned totally as usury by the mainstream of scholastic writing: only a minority followed Cardinal Hostiensis and Olivi in allowing lucrum cessans – return on investment foregone – and then only for a charitable loan and not for professional money-lenders. Foreign exchange transactions fared no better, the mainstream of scholastics, including St Thomas, simply condemning them outright as usurers and as trying to charge interest on barren money.
By the thirteenth and fourteenth century, however, bills of exchange were coming into prominence as credit instruments, particularly in foreign exchange dealings. Sophisticated forms of foreign exchange transactions developed, in which dealers could charge and pay interest on credit, but such transactions were formally disguised as purchases or sales of foreign currencies. Again, most scholastics continued to condemn exchange dealings, but a courageous minority arose during the fourteenth century to champion these now pervasive transactions, in which the Church itself had for a long time been engaged. It started weakly with Aquinas’s chief personal disciple, Giles of Lessines, who while confused about the foreign exchange market, did speak of risk as justifying these credit transactions and also showed that the exchange dealer gives something of ‘more utility’ to his customer than what the customer pays, entitling him to an extra charge.
The main defence of the foreign exchange market was launched by the distinguished Franciscan Alexander Bonini, also known as Alexander of Alexandria or Alexander Lombard. Bonini had an academic career at the University of Paris, then lectured at the papal court in theology, and finally served as the Franciscan provincial in his native Lombardy, the site of the most notorious usurers of the day. In his Treatise on Usury, a lecture given at Genoa in 1307, Alexander, while attacking usury in the usual way, presented a thoroughgoing defence of the foreign exchange transactions with which he was familiar. Attacking the Aristotelians, Alexander pointed out that money cannot have only one function, of serving as a barren medium of exchange, since there are many coins and these coins must be exchanged. The value of the coins thus traded, furthermore, is properly determined not by law but by the weight and the content of the coins. Alexander also adopted Giles of Lessines’s insight that the dealer provides more utility to his customer than he receives in the money transactions. As for credit transactions in foreign exchange, Alexander Lombard did not defend them all, but provided a lucrum cessans defence for the changes in the value of a money between the beginning and the end of the transaction. Indeed, Alexander was one of the first to point out that the demand for money can and does vary over time, giving rise to changes in the value of money. Lucrum cessans provided the entering wedge for the scholastic justification of the main method by which the usury prohibition was evaded during and after the High Middle Ages.
It is illuminating that Alexander had begun his defence with the practical point that ‘the Church always condemns and pursues usurers, but it does not condemn and pursue the exchange dealers, but, rather, fosters them as is apparent in the Roman Church’.
Alexander Lombard’s defence of the foreign exchange market was repeated verbatim by his disciple and successor as Franciscan provincial of Lombardy: Astesanus (d. 1330). Astesanus, like his mentor, came from Lombardy, specifically from Asti, one of the principal locations of the leading international usurers. His main work was his Summa (1317). Like his predecessor, Astesanus was impressed by the fact that ‘the Roman Church fosters the exchange dealers’. Furthermore, he adds to Alexander’s reasoning a frank defence of lucrum cessans, which he was one of the first theologians, as distinct from canonists, to embrace.
Among the prominent fourteenth century writers we have already discussed, Heinrich von Langenstein, as we might expect, denounced all foreign exchange dealers as usurers per se. Even Nicole Oresme simply repeated the Aristotelian shibboleth that the trade of money for money is unnatural because money is barren. While not precisely declaring exchange transactions to be usurious per se, Oresme, in a flight of hate, denounced foreign exchange as ‘vile’, as an occupation that stains the soul just as cleaning sewers stains the body.
In contrast, however, Jean Buridan, Oresme’s mentor, engaged in a defence of foreign exchange, distinguishing two kinds of exchange, one where the dealer ‘gets only as much as he gives’ – perfectly worthy according to the Aristotelian-Thomist tradition – and another where the dealer ‘takes more than he gives’. But here Buridan makes another might leap in tearing down some of the irrational barriers that the scholastics had drawn up against monetary transactions. For even the latter kind of transaction, declared Buridan, may be legitimate, even if there is no equivalent in exchange, provided the exchange promotes the ‘common good’. While not used for ordinary usury, Buridan’s new concept sowed the seeds for total justification of the foreign exchange bankers.
At the turn of the fifteenth century, a thoroughgoing defence of exchange contracts was set forth by the sophisticated Florentine lay canon lawyer Lorenzo di Antonio Ridolfi (1360–1442). Ridolfi was a lecturer at the Athenaeum in Florence and was at one time ambassador of the Florentine Republic. Just as Lombard was unwilling to condemn a practice encouraged by the Church, so Ridolfi declared his unwillingness to condemn an occupation pervasive in his native Florence. Developing the insight of Lombard, Ridolfi, in his 1403 treatise on usury, emphasized that the value of money can differ from one place to another as well as over time. These differences are the result of changes in the demand for money, fluctuations of the demand relative to the supply, and alterations in the metallic content of the coinage. These variations justify foreign exchange dealings as well as credit transactions within them. Thus, Ridolfi developed the theory which showed that the value of money, like any other commodity, is determined by the interactions of its demand and supply, and that it too can vary in value over time and place.
3.6 The worldly ascetic: San Bernardino of Siena
The great mind, and the great systematizer, of scholastic economics was a paradox among paradoxes: a strict and ascetic Franciscan saint living and writing in the midst of the sophisticated capitalist world of early fifteenth century Tuscany. While St Thomas Aquinas was the systematizer of the entire range of intellectual endeavour, his economic insights were scattered in fragments throughout his theological writings. San Bernardino of Siena (1380–1444) was the first theologian after Olivi to write an entire work systematically devoted to scholastic economics. Much of this advanced thought was contributed by San Bernardino himself, and the highly advanced subjective utility theory was cribbed word for word from the Franciscan heretic of two centuries earlier: Pierre de Jean Olivi.
San Bernardino’s book, written as a set of Latin sermons, was entitled On Contracts and Usury, and was composed during the years 1431–33. The treatise began, quite logically, with the institution and justification of the system of private property, proceeded to the system and the ethics of trade, and continued to discuss the determination of value and price on the market. In ended with a lengthy discussion of the tangled usury question.
San Bernardino’s chapter on private property was nothing remarkable. Property was considered artificial rather than natural, but still vital for an efficient economic order. One of Bernardino’s great contributions, however, was the fullest and most cogent discussion yet penned on the functions of the business entrepreneur. In the first place, the merchant was given an even cleaner bill of health than had been given by Aquinas. Sensibly, and in contrast to early doctrines, San Bernardino pointed out that trade, like all other occupations, could be practised either licitly or unlawfully. All callings, including that of a bishop, provide occasions for sin; these are scarcely limited to trade. More specifically, merchants can perform several kinds of useful service: transporting commodities from surplus to scarce regions and countries; preserving and storing goods to be available when the consumers want them; and, as craftsmen or industrial entrepreneurs, transforming raw materials into finished products. In short, the businessman can perform the useful social function of transporting, distributing, or manufacturing goods.
In his justification of trade, San Bernardino finally managed to rehabilitate the lowly retailer, who had been scorned ever since ancient Greece. Importers and wholesalers, Bernardino pointed out, buy in large quantities and then break bulk by selling by the bale or load to retailers, who in turn sell in minute quantities to consumers.
Realistically, Bernardino did not condemn profits; on the contrary, profits were a legitimate return to the entrepreneur for his labour, expenses and the risks that he undertakes.
San Bernardino then goes into his trenchant analysis of the functions of the entrepreneur. Managerial ability, he realized, is a rare combination of competence and efficiency, and therefore commands a large return. San Bernardino lists four necessary qualifications for the successful entrepreneur: efficiency or diligence (industria), responsibility (solicitudo), labour (labores), and assumption of risks (pericula). Efficiency for Bernardino meant being well-informed about prices, costs, and qualities of the product, and being ‘subtle’ in assessing risks and profit opportunities, which, Bernardino shrewdly observed, ‘indeed very few are capable of doing’. Responsibility meant being attentive to detail and also keeping good accounts, a necessary item in business. Trouble, toil, and even personal hardships are also often essential. For all these reasons, and for the risk incurred, the businessman properly earns enough on successful investments to keep him in business and compensate him for all his hardships.
On determination of value, San Bernardino continued in the mainstream scholastic tradition, with value and the just price being determined by the common estimation of the market. Price will fluctuate in accordance with supply, rising if supply is scarce and falling if abundant. Bernardino also has a penetrating discussion of the influence of cost. Cost of labour, skill and risk do not affect price directly, but will affect the supply of a commodity, and ceteris paribus (other things being equal – a phrase used by San Bernardino) things requiring greater effort or ingenuity to produce will be more expensive and command a higher price. This insight prefigures the Jevons/Austrian analysis of supply and cost over five centuries later.
As in the case of other scholastics, the common estimation of the market was held to be the common market price (but not a price set by individual free bargaining). The government was considered able to fix a common market price by compulsory regulation, but this possibility, as in the case of most other scholastics, was dismissed quickly.
As we have seen, San Bernardino took over word for word the remarkable subjective utility theory of value published (and previously neglected) by the Franciscan Pierre de Jean Olivi. Bernardino’s significant contribution to the theory of the just-as-market price was to apply it to the ‘just wage’. Wages are the price of labour services, Bernardino pointed out, and therefore the just, or market wage will be determined by the demand for labour and the available supply of labour on the market. Wage inequality is a function of differences of skill, ability and training. An architect is paid more than a ditch-digger, Bernardino explained, because the former’s job requires more intelligence, ability and training, so that fewer men will qualify for the task. Skilled workers are scarcer than unskilled, so that the former will command a higher wage.
In a sophisticated discussion of foreign exchange, Bernardino put his imprimatur on transactions that were the dominant way in which hidden interest was charged for a credit transaction. Here, Bernardino followed the latitudinarian view of his master Alexander Lombard. Generally, exchange transactions were conversions of currencies and not loans. Furthermore, usury was only a certain and riskless interest on a loan; foreign exchange rates fluctuated and were therefore unpredictable. This was technically true, but generally lenders received interest on exchange transactions, since the money market was structured to favour the lender in this way. Bernardino also pointed out that conversion of currencies was necessary because of the great diversity of currencies, and because the coinage of one country was not acceptable elsewhere. The money-exchangers, therefore, performed a useful function by enabling foreign trade, ‘which is essential to the support of human life’, and by transferring funds from one country to another without requiring the actual shipping of specie.
San Bernardino of Siena was a fascinating and paradoxical combination of brilliant, knowledgeable, and appreciative analyst of the capitalist market of his day, and an emaciated ascetic saint fulminating against worldly evils and business practices. Bernardino was born in 1380 to a high official of Siena; his father, Albertollo degli Albizzeschi, was governor of the town of Massa for the Republic of Siena. Bernardino’s mother also belonged to a prominent local family. Joining the strictly ascetic order of the Observant Franciscans, Bernardino soon became noted as a persuasive and highly popular travelling orator, preaching throughout northern and central Italy. In the 1430s, Bernardino was appointed vicar general of the Observant Franciscans. Three times in his lifetime, San Bernardino was offered bishoprics (in Siena, Urbino and Ferrara), and each time he refused this honour, since he would have had to give up his preaching.
Some of Bernardino’s anti-worldly preaching dwelt on problems of personal morality; thus, he deplored the practice of travelling merchants staying away from home for long periods, and then defiling themselves by living in carnal sin or even sodomy, which the saint habitually referred to as ‘filth’. Indeed, in his youth, Bernardino punched a man who had made homosexual overtures.
But Bernardino’s main contradiction between sophisticated analyst of business and denouncer of business practice lay in his fulmination against usury. Surrounded by the home of usury in Tuscany, San Bernardino, in common with so many scholastics, found that realism stopped short at the usury door. On the usury question, the saint’s brilliant analysis and benign view of the free market failed him, and he fulminated almost in a frenzy: usury was a vile infection, permeating business and social life. Whereas other scholastics had taken seriously the objection that Church and society depended upon usury, Bernardino did not care. No: it could not be. All those holding that usury was economically necessary were committing the sin of blasphemy, since they would therefore be saying that God had bound them to an impossible course of action. Abolish the charge of interest, Bernardino opined, and people would then lend freely and gratuitously; and besides far too much is being borrowed now, for frivolous and vicious purposes. Usury, the saint thundered, destroys charity; it is a contagious disease; it stains the souls of all in society; it concentrates all the money of the city into a few hands or drives it out of the country; and what is more, it justly brings the wrath of God upon the city, and invites the Four Horsemen of the Apocalypse.
One can only stand in awe at the fury of unreason in which this truly great thinker indulged himself on the usury issue. Ranting about the usurer daring to ‘sell time’, Bernardino went further than his predecessors in insisting that only Jesus Christ ‘knows the time and the hour. If therefore it is not ours to know the time, much less is it ours to sell it’. Is keeping watches and clocks therefore a mortal sin? Bernardino winds up in a fit of almost hysterical frenzy at the hapless usurer:
Accordingly, all the saints and all the angels of paradise cry then against him [the usurer], saying ‘To hell, to hell, to hell.’ Also the heavens with their stars cry out, saying, ‘To the fire, to the fire, to the fire.’ The planets also clamor, ‘To the depths, to the depths, to the depths.’
And yet, despite all this, San Bernardino added his great weight to the concept that would eventually scuttle the usury prohibition: lucrum cessans. Following Hostiensis and a minority of fourteenth century scholastics, Bernardino admits lucrum cessans: it was all right to charge interest on a loan which would be the return sacrificed – the opportunity foregone – for a legitimate investment. It is true that Bernardino, like his predecessors, limited lucrum cessans strictly to a charitable loan, and refused to apply it to professional money-lenders. But he made an important analytic advance by explaining that lucrum cessans is legitimate because in that situation money is not simply barren money but ‘capital’. As Bernardino put it, when a businessman lends from balances which would have gone into commercial investment, he ‘gives not money in its simple character, but he also gives his capital’. More fully, he writes that money then ‘has not only the character of mere money or a mere thing, but also beyond this, a certain seminal character of something profitable, which we commonly call capital. Therefore, not only must its simple value be returned, but a super-added value as well’.
In short, when money functions as capital, it is no longer barren or sterile; as capital it deserves to command a profit.
There is something more. In the course of lengthy arguing against hidden usury in various forms of contracts, the brilliant mind of San Bernardino stumbles, for one of the first times in history, upon what later would be called ‘time-preference’: that people prefer present goods to future goods (i.e. the present prospect of goods in the future). But he failed to recognize its importance, and dismissed the point. It was left to the late eighteenth century Frenchman Turgot and then to the great Austrian economist Eugen von Bohm-Bawerk to discover the principle in the 1880s and hence finally solve the age-old problem of explaining and justifying the existence and height of the rate of interest.
3.7 The disciple: Sant’Antonino of Florence
San Bernardino’s major disciple was the highly influential and slightly younger Sant’Antonino of Florence (1389–1459). Much of Antonino’s influence came from his prolific writings, especially his enormous Thomistic Summa Moralis Theologiae (1449), the first treatise in the new science of moral theology. In moral theology, or casuistry, the theologian takes the abstract principles of theology and ethics and applies them to the detailed empirical data of daily life: in short, theology and morality were brought from the abstractions of the study and applied to the details of everyday life.
Sant’Antonino’s pioneering Summa of moral theology proved to be extraordinarily influential. It was frequently consulted for the next 150 years, and went through 24 printings in that period. His shorter Confessionals (1440), a guidebook for confessors, was reprinted 30 times in the same century and a half.
There are striking parallels in the lives and personalities of Antonino and his master Bernardino. Sant’Antonino was born the son of a minor official, the notary of Florence, Ser Niccolò de Pierozzo dei Forciglioni. The son’s first name was Antonio, but he was universally called by the diminutive Antonino because of his short stature, and the nickname is listed in the official Church calendar of saints. Although in frail health, Antonino early joined the strict, Observant branch of the Dominican Order. His administrative talents were unusual and spotted quickly, and he soon became prior of the Dominican friary of Cortona, and was then transferred to similar posts in Naples and Rome. After that, Antonino was appointed vicar-general of the Dominican friaries of Lombardy in 1433, and four years later, also of all central and southern Italy. In addition to his vicarate, Antonino continued as prior of San Marco in Florence.
In 1445, Pope Eugene IV appointed Sant’Antonino to the archbishopric of Florence, possibly on the advice of the great Renaissance painter, Fra Angelico. A humble man, Antonino followed Bernardino in stubbornly refusing to accept the post. The pope issued stern commands for Antonino to accept, and the story of a contemporary asserts that he only took the office under penalty of excommunication. In any event, Sant’Antonino refused for the rest of his life to wear episcopal robes and continued to wear the white habit and black cloak of a simple Dominican friar. Ironically, upon his death in 1459, Antonino was buried in full pomp and ceremony.
Despite his reluctance, Antonino became a distinguished administrator and judge, daily making countless economic decisions. In Florence he became steeped in knowledge of the financial and economic practices of the most advanced capitalist centre of his day.
Sant’Antonino is habitually bracketed with Bernardino as two great scholastic thinkers and economists. But Antonino was merely a popularizer and casuist; in his analysis he simply repeated the views of the truly great and creative thinker, San Bernardino. Both men were thoroughly familiar with the economic practices of their day, and Antonino came from Florence, the great banking centre of Europe. Yet both men were humble ascetics, and the same tension and contradiction of worldly asceticism appeared in their works and lives.
Generally, Antonino simply repeated Bernardino’s analysis. In his discussion of value theory, however, Antonino further stressed Aquinas’s crucial point that any exchange on the market is for the mutual benefit of both parties, since each is better off than he was before. A voluntary sale is a just one. And yet, Antonino seems more sympathetic than his mentor to government price regulation which, where it exists, must be morally binding. Any black market price over a legal maximum is a sin.
On the just wage, Antonino echoes Bernardino and adds material based on his extensive knowledge of the great Florentine woollen industry. The wage of a labourer is properly determined by common market estimation, and any attempt to form a union of workers would be harmful interference. This view implicitly endorsed the Florentine practice of outlawing wool-worker unions as unlawful ‘conspiracies’. The monopolistic Wool Guild of clothiers, however, was legal; not surprisingly, since it controlled the government of Florence. The word ‘guild’ does not appear in Antonino’s work on labour conditions; perhaps he felt it more prudent to ignore this controversial issue.
Despite the discipleship, there were definite though subtle differences between the two worldly saints. Even though Antonino was more knowledgeable of the business world, he was, paradoxically, considerably more moralistic. Thus, one of Antonino’s numerous works was a pamphlet, On Women’s Fashions (De ornate mulierum), in which he fulminated at great length against women’s use of rouge, false hair, fancy hairdos, and other fripperies. His talent for moralism was of course reinforced by his pioneering work in casuistry. Likewise he sounded off on artists, condemning all except religious art, especially exempting the work of his friend, Fra Angelico. Antonino was particularly upset because paintings of non-religious subjects gave artists the opportunity to depict nude women, ‘not for the sake of beauty but to arouse libidinous feelings’. (Antonino did make the intelligent observation, however, that the price of paintings is determined by the artist’s skill rather than by the amount of labour involved.) Antonino’s censorious views also reached into music, where he called for going back to the austere Gregorian chant and eliminating the sinful introduction of counterpoint and popular and even lewd ballads.
In more strictly economic concerns, Antonino’s heightened moralism was also evident. In contrast to his master, Antonino largely fulminated against foreign exchange transactions as implicit usury. As Raymond de Roover wonderingly remarks: ‘This advice, if followed, would have abolished banking altogether, a rather strange attitude on the part of the archbishop of the leading banking center in Western Europe. Most of the theologians were more lenient, although less consistent...’5
Antonino’s ranting against usury was fully as exuberant as Bernardino’s, and was heightened by the fact that he served as the Apostolic commissary for the repression of usury in Tuscany. Antonino is the all-out denouncer of usury, drawing together all possible arguments with their most severe interpretation. As Professor Noonan states,
... by being more systematic, Antonino is more severe than many of his predecessors... Antonino draws together all the strict rules of the early usury teaching into a tight set of rules. No later writer of note will be as severe, as uncompromising, as true to the logic of the earlier conceptions as he.6
Furthermore, Antonino took no back seat to Bernardino in his hysterical ranting against usury. Usury is ‘diabolic’; it is the great harlot of Apocalypse 17, ‘who sitteth upon many waters, with whom the kings of the earth have committed fornication’. Not only direct usurers but all who cooperate in usury are ‘worthy of eternal death’. Usury, to Antonino, is a worse sin than adultery or murder because it continues on and on, whereas the former sins are only intermittent. The usurer is in a state of ‘perpetual sin’. Not only that: usury damns the heirs of the sinner, since the sin is not wiped out until the usurer or his estate makes restitution by giving back the interest charge. Usury, to Antonino, is everywhere, all-pervasive.
And yet Antonino, too, admits lucrum cessans as a legitimate source of an interest charge. He is so worried about hint of usury, however, that he declares that in practice lucrum cessans must never be advised.
Tragically, the subjective theory of utility, developed by Pierre de Jean Olivi in the thirteenth century, rediscovered by San Bernardino two centuries later, and spread far and wide by his disciple Sant’Antonino, died with the worldly Florentine saint. With minor exceptions, even the late Spanish scholastics of the sixteenth century, so much in the Thomist and utility tradition, did not regain these heights. It was left to the Austrian School of the late nineteenth century to independently replicate and go beyond the subjective theory of value of Olivi, and it was left to the 1950s for this line of scholastic thought to be rediscovered.
3.8 The Swabian liberals and the assault on the prohibition of usury
At about the same time that San Bernardino was developing his great work, a relatively obscure German Dominican was independently setting forth a similar analysis. Johannes Nider (1380–1438) was a Swabian who taught theology at the University of Vienna, and led a reform of the Dominican Order in southern Germany. Nider’s brief treatise, On the Contracts of Merchants (De Contractibus Mercantorum) was written about 1430, and published posthumously in Cologne about 1468; it was reprinted frequently for the rest of the fifteenth century.
Nider begins by justifying the profits of merchants. Recognizing the entrepreneurial role of the merchant, Nider stressed that trade requires market knowledge, and securing that knowledge requires industry, diligence and luck. Business incomes are justified by expenses, care and risks. In analysing market price, Nider emphasizes subjective utility as the determinant. Nider, like Olivi and Bernardino, distinguished between the objective utility inherent in a good, and subjective utility, the status of that good ‘in the estimation of men’. Nider was clear that only the latter decisively determined the just market price. Anticipating Jevons four centuries later, Nider suggests that a change in supply will alter price by changing the utility assigned to it. That common market price determines the just price is clear in Nider: ‘The proper value of a thing depends upon the ways buyers or sellers may think about prices’. Yet, where there is no common market, Nider joins previous scholastics in stating that sellers may adopt a cost-plus approach to find out the just price that they may ask for.
While only subjective utility is treated in determination of price, there are disquieting signs in Nider of Langensteinian ‘status’ arguments in justifying business income. For businessmen’s incomes, in addition to being determined by the economic factors mentioned above, must also be decided ‘in proportion to the nobility’ of the effort – a prelude to Nider’s making clear that the work of the soldier is nobler than that of the merchant and therefore deserves a higher reward. This is a throwback not just to Langenstein but to ancient Greek veneration of the martial as against the productive arts.
In discussing money, Nider is firm in justifying the activities of moneychangers. There is no nonsense about usury here. Nider points out that the exchange of currency is a ‘kind of selling and buying’, and demonstrates even more cogently that the value of money, like the value of other commodities, also varies in the common estimation of the market. While, following Aquinas, the value of money usually changes less radically than the value of a particular good, change it does nevertheless, merchants incurring legitimate profits or losses from such variation.
Nider writes trenchantly of ‘the conversion, or exchange of money or of other things, which is, as it were a kind of selling and buying of one currency for another, and presents, so to speak, the same moral problems as does commerce in goods...’
Far more significant than Nider was the great fifteenth century scholastic and fellow Swabian Gabriel Biel (1430–95), professor of theology at the new University of Tübingen, in Southwest Germany. Biel was a distinguished nominalist and Ockhamite – in fact, the German Ockhamites of the fifteenth century were known as Gabrielistae. And yet, recent research has discovered that Biel was essentially a Thomist in his belief in a rational and objective natural law ethic. Indeed, he echoed the belief of his fellow ‘Ockhamite’ of the previous century, Gregory of Rimini, in the highly rationalistic belief that the natural law was eternal and would exist even if God did not. Furthermore, man by his unaided reason can discern this natural law and reach the right conclusions on his proper conduct.
One of Biel’s contributions was to deliver a crystal-clear statement of the scholastic insight that each party to an exchange engaged in the action for mutual subjective benefit. Following Jean Buridan, his fellow nominalist of the previous century, Biel’s analysis was cogent and concise: ‘For the buyer who desires a good would not buy, unless he hoped for greater satisfaction from the good than from the money he paid over; nor would the seller sell, unless he hoped for a profit from the price’. There had been no clearer demonstration before Biel that every exchange involves an expected mutual benefit by each party to that transaction, and that the satisfaction of the buyer, at least, is purely subjective, though the seller’s may be translated into a monetary profit. There would be no real improvement upon Biel until the advent of the Austrian School in the late nineteenth century.
A follower of his fellow Ockhamites Jean Buridan and Nicole Oresme, Biel, in his Treatise on the Power and Utility of Moneys, repeated their metallist insights about the value of money and their attack on governmental debasement. Biel also insists, with Buridan, that a sound money must be composed of material with a use independent of its service as money. Biel regards debasement by a king as equivalent to theft: ‘if a prince should reject valid money, in order that he may buy it up more cheaply and melt it, and then issue another coinage of less value, attaching the value of the former currency to it, he would be guilty of stealing money and is required to make restitution’.
Furthermore, Biel provided a more sophisticated explanation and justification than previously available of the workings of the foreign exchange market. In his commentary on the Sentences (1484), Biel noted that a bank that accepts a bill of exchange permits the drawer of the bill to obtain cash in another city, and thereby provides the important service of ‘virtual transportation’ of the money. The drawer of the bill is relieved of the cost and the risk of moving the money himself. It is therefore licit for the banker, as lender, to profit on purchasing a foreign bill of exchange. In this way, Biel greatly widened the legitimacy of exchange transactions, for lender as well as borrower, thus strengthening the theoretical insight that the value of money varies as do particular goods.
But the great significance of Gabriel Biel in the history of economic thought was that he began the smashing of the usury prohibition that had held economic thought in thrall since the early centuries of the Christian era. In addition to completing the liberation of the foreign exchange market from the taint of usury, Biel launched the justification of insurance contracts. For if it was sinful and usurious to own property or a right without bearing risk (such as the grantor of a pure loan) then what of a man who had purchased an insurance contract, and therefore was able to transfer risk to the insurer? The defence of insurance Biel takes over from Angelus Carletus de Clavasio, vicar-general of the Observant Franciscans, who had defended riskless insurance contracts in his Summa Angelica at the same time that Biel was writing his treatise.
Biel’s main contribution in weakening the usury prohibition was his justification of the census contract – the purchase of an annuity – and justifying it in its widest possible form. Thus, purchase of an annuity was considered licit as a right to fruitful money as was an insured or guaranteed annuity. Also the buyer was allowed to redeem the annuity, a concession very close to permitting a lender to reclaim the principal of his loan after he has received a return in instalments.
Thus Biel came very close to justifying credit transactions charging interest. Explaining the fact that the seller of an annuity will often be willing to pay a high annual charge in order to get ready cash (i.e. pay interest on a loan) Biel points out with great cogency that both parties to this as any other transaction expect to benefit: ‘For a buyer desiring merchandise, unless he hoped for more advantage from the merchandise than from the money he gave, would not buy; nor would a seller sell, unless he hoped for profit from the price’.
But the most comprehensive and systematic assault on the usury prohibition came from Gabriel Biel’s most distinguished student and his successor in the theology chair at the University of Tübingen, Conrad Summenhart (1465—1511), who had also been a student at the University of Paris. The critique came in Summenhart’s massive Treatise on Contracts (Tractatus de Contractibus) (1499).
Summenhart’s contribution was twofold: first, in enormously widening all the possible exceptions to the usury prohibition, e.g. the census and lucrum cessans; and second, in launching a blistering direct assault on all the time-honoured arguments against whatever usury contracts remained. On the first, Summenhart developed the argument for insured or guaranteed partnerships far more subtly and extensively than before. He also widened the lucrum cessans exception far more than anyone had ever done. Money is fruitful, Summenhart declared boldly, it is the merchant’s tool, which he can make fruitful by the use of his labour. Consequently, the merchant should be compensated for loss of the use of his money just as a farmer should be recompensed for the loss of his fields. Unfortunately, however, Summenhart’s widening of lucrum cessans was still limited, as among the earlier scholastics, to loans made out of charity.
The boldest loosening of the usury bonds by Summenhart was in his radical defence of the widest possible interpretation of census contracts. Here Summenhart justified many of the credit transactions then used in Germany. Coupled with his development of the idea of the changeable value of money, this meant ‘the emptying of the usury prohibition of all practical significance’.7 Money, declared Summenhart, may licitly be trafficked in for profit. Furthermore, he asserted that a census is not a (sinful) loan because the right to money is a good of another kind than the money exchanged. But in that case, Summenhart asks himself, couldn’t a usurer say the same thing, and simply state that the right to money he was demanding in exchange was a good of a different kind than the money loaned? Astonishingly, Summenhart replied, this was all right, provided that the lender did not intend this to be usury, and was himself really convinced that he was buying the right to money which was a different good than the money itself. But if usury was only subjective intention and not the objective fact of a loan charging interest, then there was no objective way of identifying or enforcing the prohibition against usury! In this way alone, Summenhart effectively destroyed the prohibition against usury.
But this was not all. For Summenhart explicitly declared that the purchase by someone of a discounted debt is not a usurious loan because it is only the purchase of a right to money. The purchase of a debt was licit in the same way as a census. Furthermore, the ‘purchase of a debt’ could be that of a newly constituted debt, and not simply the purchase of a previous debt. This, too, effectively ended the usury prohibition.
Moreover, in approving ‘debt purchase’ contracts, Summenhart came close to understanding the primordial fact of time-preference, the preference of present over future money. When someone pays $100 for the right to $110 at a future date, both parties estimate present money more highly than money payable at a future date. The ‘buyer’ (lender), furthermore, doesn’t really profit usuriously from the loan because he values the future $110 as worth $100 at the present time, so that ‘the price and the merchandise are equal in fact and in the estimation of the buyer’.
Then, tackling the arguments for usury directly, Summenhart presents 23 standard natural law arguments against usury, and demolishes them all, leaving only two shaky formal arguments; while he also puts forth strong objections of his own against the usury ban. As Professor Noonan concludes, Summenhart’s ‘examination ends in a rejection of the past. Usury is left assailed in name alone. The early scholastic theory of usury is abandoned’.8 Summenhart’s argument for usury is comprehensive. Contrary to St Thomas, the usurer is charging not for the borrower’s use of his money, but for his own lack of use. If it is replied that the borrower’s restoring of the principal restores to the lender the power of use, Summenhart cogently replies, again sensing time-preference: ‘But he does not restore to him [the lender] the use of the intervening time, so that he will be able to use it [the money] for that intervening time...’. Thus interest on a loan becomes a legitimate charge for the foregone use of money during the time period of a loan. It is clear, at least implicitly, that Conrad Summenhart has magnificently demonstrated the justice of ‘usury’, of interest on a loan.
On the fixed value of money as an argument against usury, Summenhart repeats and develops the argument of earlier critics that the value of money varies over time. Furthermore, on the charge of risklessness of a money loan, Summenhart originates an argument potentially fatal to the usury ban. He points out correctly that the lender is never without risk; he always bears the risk of the borrower going bankrupt. The borrower also has the opportunity of earning more profits from the loan than the interest he has to pay the lender. Furthermore, Summenhart neatly smashed the Aristotelian argument that money by its nature was ‘meant’ to be used only as a medium of exchange and not to command interest. Summenhart boldly declares that the argument is simply absurd. Does one then commit sin by using wine to put out a fire, or by storing money in a shoe? There is nothing in the natural law that demonstrates that a material good must always be used for one particular purpose rather than for another.
We are left, after Summenhart, with only two very weak arguments against usury: the mere fact that Aristotle said it was unnatural (an ‘argument’ which Summenhart could only have meant sardonically), and the divine prohibition. But since usury is really natural, Summenhart, as we have seen, is willing to construe the divine prohibition so narrowly that it virtually disappears; after Summenhart, the usury ban is finished.
Unfortunately for the credibility of scholastic economics, however, the sixteenth century scholastics, superb as they were in many areas of economics, did not accept the bold challenge of Conrad Summenhart to scrap the usury ban completely.
In some cases, particularly in his justification of the guaranteed partnership contract, Summenhart held back from full approval, counselling prudentially against contracts, though licit, which might scandalize the community. It was left to Summenhart’s eminent student, Johann Eck, to carry the Summenhartian revolution through to its completion. Eck, professor of theology at the University of Ingolstadt near the financial centre of Augsburg in Bavaria, was soon to find his greatest fame in arguing the Catholic case against Martin Luther. Augsburg was then the leading financial centre of Germany and the home of the great bankers the Fuggers, who had captured the lucrative papal banking business from the city of Florence. In 1514, the 28-year-old Eck, a friend of the Fuggers, criticized his cautious fellow theologians for concealing the truth that the guaranteed partnership contract was fully licit, scandal or no scandal. Arguing his case before a favourable audience of canonists at the University of Bologna, Eck pointed out that merchants generally solicit the guaranteed investment contract and therefore profit by it. Furthermore, this contract had been in general use for 40 years, so that it should be assumed that the guaranteed contract is licit unless proven otherwise. Also, Eck added the modern sophisticated note that, after all, most capitalist investors in this contract are widows and orphans.
It should be noted that the eminent Scottish nominalist theologian, John Major (1478–1548), dean of the faculty of theology at the University of Paris, clearly assented to the controversial Eck-Summenhart defence of the guaranteed investment contract.
3.9 Nominalists and active natural rights
The Dominicans, as we have seen, triumphed over the Franciscans on the property rights question with Pope John XXII’s great bull, Quia vir reprobus (1329). Individual property rights were now officially established as natural, stemming from God’s granting man dominion over the earth. Despite William of Ockham’s attempt to refute John XXII, his nominalist followers took the lead in developing this active natural property rights theory. Pierre d’Ailly (1350–1420), and particularly his student and successor as chancellor of the University of Paris, Jean Gerson (1363–1429), developed the theory. Thus, as Gerson put it trenchantly in his De Vita Spirituali Animae (1402):
There is a natural dominion as a gift from God, by which every creature has a ius (right) directly from God to take inferior things into its own use for its own preservation. Each has this ius as a result of a fair and irrevocable justice, maintained in its original purity, or a natural integrity. In this way Adam had dominion over the fowls of the air and the fish in the sea... To this dominion the dominion of liberty can also be assimilated, which is an unrestrained faculty given by God...9
It is odd that this nominalist and mystic, after setting forth the view of human rights as a dominion, should also hold, among a minority of scholastics, that any mercantile profit over and above costs and risk is immoral, and that the government should fix all prices to assure a just price.
The active rights theory was championed by the Gersonian Conrad Summenhart, and then advanced further by the nominalist John Major. In his commentary on the Sentences of Peter Lombard (1509), Major, a century after Gerson, drew the logical conclusion that not only man’s right and dominion were natural but so too was private property. Major’s student Jacques Almain put it clearly (Aurea opuscula, c.1525): ‘Natural dominion is thus the dispositional power or faculty of using things which people can employ in their use of external objects, following the precepts of the law of nature – by which everyone can look after their own bodies and preserve themselves.’
Throughout the fifteenth century, and into the sixteenth the active theory of natural rights seemed to reign unchallenged.
3.10 Notes
Oftentimes have we reflected on a similar abuse
In the choice of men for office, and of coins for common use;
For your old and standard pieces, valued and approved and tried,
Here among the Grecian nations, and in all the world beside,
Recognized in every realm for trusty stamp and pure assay,
And rejected and abandoned for the trash of yesterday;
For a vile, adulterate issue, drossy, counterfeit and base,
Which the traffic of the city passes current in their place.
Aristophanes, The Frogs
Quoted in J. Laurence Laughlin, The Principles of Money (New York: Charles Scribner’s Sons, 1903), p. 420.
- 1 The population decline was roughly uniform throughout western Europe, with the Italian population falling from 10 to 7.5 million, France and the Netherlands from 19 to 12 million, Germany and Scandinavia from 11.5 to 7.5 million, and Spain from 9 to 7 million. The largest percentage drop was in Great Britain, where the number of inhabitants fell from 5 to 3 million in this period.
- 2 Lionel Rothkrug, Opposition to Louis XIV: The Political and Social Origins of the French Enlightenment (Princeton, NJ: Princeton University Press, 1965), p. 14.
- 3 On Buridan and modern indifference analysis, see Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), pp. 94n, 1064. For a critique, see Murray N. Rothbard, Man, Economy and State (1962, Los Angeles: Nash Publishing Co. 1970), 1, pp. 267–8.
- 4 And more fully:
- 5 Raymond de Roover, San Bernardino of Siena and Sant’Antonino of Florence (Boston: Baker Library, 1967), p. 37.
- 6 John T. Noonan, Jr, The Scholastic Analysis of Usury (Cambridge, Mass.: Harvard University Press, 1957), p. 77.
- 7 Ibid., p. 233.
- 8 Ibid., p. 340.
- 9 Richard Tuck, Natural Rights Theories (Cambridge: Cambridge University Press, 1979), p. 27.
