Trade as Good as Gold—or, How the Hanseatic League Thrived without Debt
We’re often told that international trade thrives on debt. In an especially risky line of business, financial intermediation, with its loans and guarantees, is the indispensable infrastructure for the progress of commerce. Perhaps entrepreneurs wouldn’t even consider selling goods to foreigners if it weren’t for banks and credit markets to finance them. Naturally, if and when markets fail in this role, Ex-Im Banks and other government intervention must provide ‘extra liquidity’ for trade.
While this string of non-sequiturs sweeps economists of all stripes, international trade—or better yet, trade in general—is better off not ‘banking on’ such helping hands. Without doubt, loans have their economic role, but retained earnings, equity, or simply cash-hoarding can be just as effective in transferring purchasing power to entrepreneurs. In fact, international trade thrived in times when banking and financial systems were not only in their in their infancy, but also when oceanic trade was dangerous and expensive. Nonetheless, it began as a self-financed venture, a venture for which merchants themselves set money aside. The Hanseatic League (c. 13th to 17th century)—a commercial association of traders from German towns—is a good example of this type of financial behavior.
Philippe Dollinger’s detailed chronicle of Hansa’s development shows that trades were financed from a merchant’s own accounts, or from those of his associates. Entrepreneurs bought shares in each cargo and in each ship, and subsequent profits and losses were divided in proportion to the capital invested; the captains of the ships, who sailed together for mutual protection, sometimes joined the ranks of shareholders. In spreading their investments over several cargoes—diversifying their portfolios, as it were— merchants also reduced the risk of transporting their goods over long distances. For centuries, no banks took part in these commercial networks, “but this in no way precluded the existence of merchants operating on a large scale, investing large amounts of capital, carrying out … complex commercial operations in various geographic regions” (Dollinger 1970, 168).
The Hanseatic League’s approach to business was furthermore defined by an outright hostility to debt, as the practice of borrowing money was proscribed in many mercantile quarters. By the 14th century, Hanseatic towns embarked upon a systematic campaign against financing commerce via credit,
on the grounds that it caused instability of prices, which would upset business. Sometimes a buyer… not being obliged to pay on the nail, would agree to an excessive credit. Credit was also accused of increasing the temptation to take risks, and even worse, of favoring the dishonest schemes of unscrupulous merchants, thus compromising the good name of the Hansa (Dollinger 1970, 205).
Modern scholars are puzzled by the fact that—with all its ‘oddities’— the Hanseatic League thrived for almost four centuries. Its eventual demise was caused by 17th century German princes, who constrained the commercial and political independence which Hansa towns and merchants had enjoyed. Despite what we’re told, the absence of credit markets had nothing to do with it.
But if credit is not indispensable to international trade, what is? The truly important infrastructure of international trade is the monetary system. Each Hansa town, in fact, had the privilege of minting its own silver coin; consequently, the merchants “anxious to develop their trade… were careful not to exploit their coinage as a source of revenue by means of frequent debasement” (Dollinger 1970, 207). Economic growth and trade blossomed without inflation. And as professor Hülsmann points out, “in a natural monetary order based on precious metals such as silver and gold, there [were] no special incentives to take out a loan because… prices tend to fall in the long run”, to the disadvantage of debtors.
However, in today’s world of fiat inflation and constantly rising prices, debt becomes increasingly attractive for firms that trade at home and abroad, and fractional reserve banking makes sure that credit abounds. As a result, show recent studies, an average company starts up with 3 to 7 times more bank loans on its balance sheet that any other type of finance—even when it can access equity markets. Commerce wedded to bank debt not only becomes subject to business cycles, but centralizes financial decision-making toward banks, and away from entrepreneurs. In other words, “the entrepreneur who operates with 10 percent equity and 90 percent debts is not really an entrepreneur anymore. His creditors (usually bankers) are the true entrepreneurs who make all essential decisions. He is just a more or less well-paid executive—a manager” (Hülsmann 2004).
A growing supply of fiat money and fiduciary media does not, cannot, and need not satisfy the growing ‘needs of trade’. Just let free enterprise and sound money flourish, and international trade is as good as gold.