I think just about every school child in Spain, Italy and the Americas knows that in 1492, a trio of ships from Europe landed in the Caribbean, an event that ended up radically changing the lives of everyone on the planet.
But something else happened of equal importance in 1492, in fact during the same month that the expedition was first authorized. From the first page of the diary of Christopher Columbus:
Así que, después de haber echado fuera todos los judíos de vuestros reinos y señoríos en el mismo mes de enero mandaron Vuestras Altezas a mí que con armada suficiente me fuese a las dichas partidas de India; y para ello me hicieron grandes mercedes y me ennoblecieron que dende en adelante yo me llamase Don, y fuese Almirante Mayor de la Mar Océana y Virrey y Gobernador perpetuo de todas las islas y tierra firme que yo descubriese y ganase, y de aquí en adelante se descubriesen y ganasen en la Mar Océana, y así me sucediese mi hijo mayor, y así de grado en grado para siempre jamás.
If your Spanish is a little rusty, the passage notes that in the same month that the royal highnesses of Spain (Isabela y Ferdinand) gave Columbus the title “Lord Admiral of the Seas” and began equipping his ships, they also expelled all of the Jews from Spain.
If you’re vaguely familiar with your Jewish history, you probably already know this as it was a watershed event. Although less formalized in some places, other European monarchs soon followed suit. Hundreds of thousands of Jews were dislodged all over Europe, some migrating to Muslim lands, where they were quite welcomed.
Others however found a new home in one particular place in Europe and it is because of this that I am writing today. Because it is as a result of these two events in 1492 that a unique new form of society came into being, one that now dominates much of the globe. I am, of course, talking about the rise of capitalism.
This post will be long enough so I’m going to summarize a few key things here. The first thing to keep in mind is that in those days the map of Europe was much different. All nations were ruled by monarchies who made alliances or fought wars based on their personal interest. England and Wales were two separate nations, England being closer to Portugal than its next-door neighbor. The Spanish king was lord over most of what is Germany today. Parts of modern Italy were under Spanish control. France and Scotland were allies and so on and so forth (and good old Cluj, where I am writing today, was part of Hungary).
Secondly, the old feudal system (and more importantly, its economy) was the dominant mode of existence for much of the population. This means that very few people lived in cities. Most of the population was involved in some sort of animal husbandry or farming. Almost all of the land was owned by either 1) the king 2) the nobles or 3) monasteries. And almost all of the “money” changing hands, whether for taxes or for other feudal obligations was in the form of commodities, goods or services. It was entirely possible for a peasant to live their whole lives without ever once handling actual money, i.e. metal coins.
In talking about economic systems, it’s important to understand a few basic terms. Therefore I’ll use the example of a peasant in 1492 who has certain obligations to the noble who owns the land.
Commodity – Anything that is “undifferentiated”, meaning one is as good as another. A peasant might owe his noble 100 kilos of wheat per year. This would be a commodity because one kilo of wheat is roughly the same as any other kilo of wheat.
Goods – Something that is tangible (you can touch it) but is distinct. A peasant might owe his noble 20 pairs of woolen clothes per year. These are goods because they are distinct products which must be made/crafted somehow.
Service – This is an activity that is performed. Peasants often owed their nobles an obligation (tax) of certain days of the year that they had to work on the noble’s lands to harvest his crops. This is a service.
In 1492, almost the entire economy in Europe was based on this feudal system. While peasants owed their nobles some of the things listed above, the nobles in turn owed the king similar things, either in the form of commodities (livestock, crops), goods (weapons, etc) or services (sending men to fight in the endless wars). There was of course a use for money (as in coins made of precious metals) but it was a small part of the economy. The money that did exist was entirely based on actual coins (or in rare cases, bars) of actual metals that were then stamped (minted) in a way to make them official and was used in the trade of the commodities, goods and services described above.
As far as the monarchs and other leading nobles of Europe were concerned, there were two major problems with their “economies” (the term hadn’t quite been invented yet). The first was a very old ban on usury for anyone who was a Christian. This meant that Christians were largely quite unsophisticated when it came to understanding money (and financial principles) because for centuries they had relegated it to the only population which was legally allowed to handle these kinds of transactions – the Jews.
Note: a lot of people have a hatred towards Jews (called anti-semitism) partly based on the fact that money lending (and later financial expertise, including banking) was and is often dominated by Jews. I used to live in Israel and have no antipathy towards either the Jewish religion or the fact that due to historical reasons both Muslims and Christians were banned from a lot of financial dealings and thus it became largely the province of Jews, nor do I want anyone to take what I am writing here today as some kind of support for hating or resenting Jews because of this. Banking is evil all on its own and the religion of the banker is entirely irrelevant.
The second major “problem” for monarchs at the time was that wars were (and still are today) quite expensive. The only way a monarch could increase his wealth and status was to conquer territories from some other monarch. But the “income” that a monarch received was largely in the form of commodities, goods and services and not a whole lot of cash money. So once the cash was spent, how could the king raise more money and thus buy more weapons, hire (and feed) more soldiers, build warships and fortify castles?
In terms of the birth of capitalism, two very interesting things occurred as a result of the events of 1492. The first is that many of the expelled and harassed Jews of Europe ended up in what we would call the Low Countries today, particularly (what is known today as) northern Belgium and Holland, which at the time were controlled by Spain. Because of a wide variety of geopolitical circumstances, including wars between England and Spain and the Protestant reformation, the cities of Antwerp (in modern Belgium) and then Amsterdam (in modern Holland) became a very unique place. Nowadays people refer to it as the Dutch Golden Age.
The other interesting fallout from 1492 was that Spain began receiving thousands of tons of gold and silver as a result of their conquests of the native peoples (and lands) of the Americas. This was considered by the monarchs to be wonderful because gold and silver were literally money. So with relatively little effort, lots and lots of money was coming in to the royal treasury. Surely Spain was the richest country in Europe, right?
To everyone’s surprise, the more gold and silver that Spain imported, the poorer everyone got. This was because no one at the time understood (or even had a name for) inflation. To put it simply, the more gold and silver that Spain received, the more expensive everything became and thus the money itself became worth less. In relatively short order, this inflation spread throughout Europe and destabilized the treasuries of other monarchs, including most importantly that of Henry VIII (8th) of England.
Henry 8th became the king of England in 1509 and is most famous for his six wives and all that resulted from this, including separating the English Church (now called Anglican) from the Catholic Church and the pope. However a number of other extremely important things happened under his reign that have to do with the rise of capitalism.
The prior king (Henry 7th) actually left his son a very large amount of cash money. However, partly due to extravagance (Henry 8th loved building palaces and throwing parties) and partly due to inflation, Henry 8th found that he desperately needed cash. One of the seminal acts of his reign was to “dissolve” the monasteries. A better way to say this was that he wholesale looted the monasteries. Essentially he declared that all the land owned by religious groups (along with all of its tenants providing income) now belonged to the king.
And for a while, this new influx of income did the trick, allowing Henry 8th to finance both his palaces as well as his ongoing wars. But soon this income too was not enough and so he had to reach out to Antwerp, home to the world’s first international money market. For a period of about 40 years, almost the entirety of the king’s income was raised through trading in this single city. But how? And what exactly was going on here? How and why was the king of England raising gigantic sums of money in a single city in a foreign land?
The world’s first stock market, called “Bourse” or some variant thereof in almost all languages (Rom: bursa) except for English (of course) opened in Antwerp in 1531. Because it was a port city, because it was a leading center of religious toleration, because many of the expelled Jews congregated here, because of the explosion in global trade, because of the gap in geopolitical control, Antwerp (and later Amsterdam) were at the very nexus of trade, not only trade in commodities and goods but also trade in money itself. For the very first time, there was one common place (an actual building) where people who wanted to trade and sell things could meet and agree on ways to do it. With the high concentration of Jews and their centuries of experience about financial issues, this trading in money itself took off like a rocket.
Nearly every aspect of what we call modern financing, from “forward” contracts, “option” contracts, “stocks”, “securities”, commodities trading and even “sovereign bonds” were created here. For example, the Spanish government had something called juros (link in Spanish), a kind of sovereign or treasury bond. The government would essentially sell someone a piece of paper for a sum of money, with the promise to pay the money back at a later date with interest. These juros themselves were traded at the Antwerp bourse, with people buying and selling them in between themselves independent of the Spanish government. Likewise, with the help of Thomas Gresham and others, Henry 8th of England was able to finance his palaces and wars through similar measures.
With the unexpected arrival of severe inflation and the relative ease at which large amounts of money could be raised at the bourse, the fundamental aspects of capitalism had great appeal to monarchs and powerful men at the time. By 1565, Thomas Gresham had set up the Royal Exchange in London, which still exists today. Using his new independence from the pope, it wasn’t long before Henry 8th relaxed the laws on usury for Christians to allow them to get in on the “action” as well. No longer did monarchs and other powerful men have to rely on actual cash on hand but with the power of speculation and financial trading, they could have what they wanted without waiting.
But even with all of the sophisticated terms and contracts and different ways of trading things, from “shorts” to “longs” to “futures” and “options” and all the rest, this still wasn’t quite capitalism. What was happening in the Antwerp bourse was a kind of sophisticated form of gambling. I bet you X dollars that the price of wheat will go down, you bet the opposite, and one of us ends up winning and making money. Even the floating of sovereign debt was a kind of gambling, wherein you lend money to royalty today, taking the gamble that through conquests or winning wars (or whatever else), they’ll be able to pay you back more money in the future. Gambling has been around for thousands of years. If you and I sat down and bet on flipping coins, one of us might make a profit but it sure wouldn’t be capitalism.
So what makes it “true” capitalism? I would say the true founder of capitalism was a descendent of those expelled Jews whose family had moved to the “Low Countries”, a man whom almost no one knows today, a man named Isaac Le Maire. Originally a (wealthy) grocer in Antwerp, in 1585 Spanish troops destroyed much of the town (including the bourse) and so Isaac Le Maire as well as the financial “action” of the bourse (and most of the inhabitants of the city) moved to Amsterdam. A new bourse was created there as well as the first multinational corporation in history, the Vereenigde Oost-Indische Compagnie (VOC), known in English as the “United East India Company” (Romanian: Compania Indiilor Olandeze de Est).
The VOC was a trading company, given an exclusive monopoly (by the newly independent Dutch government) to valuable spices and other imported commodities and goods, with shares available for purchase by anyone from any country. Besides all the older “action” on the Antwerp bourse, there was an extremely brisk trade in selling and buying of VOC stocks in the Amsterdam bourse. Extremely complicated strategies on how to trade these stocks soon arose, later detailed in a book (written in Spanish) called Confusión de confusiones (the meaning of which, I think is evident). For the first time ever, ordinary people could make a living solely off the profit from trading financial instruments of one kind or another.
Isaac Le Maire used his family’s income to become the largest shareholder (owner of stock) of the VOC when it was created in 1602. As a result of his dominant position, he became the “governor” of the VOC, in effect the world’s first CEO. Whether true or not, other large shareholders became convinced that Le Maire was embezzling funds and so had him expelled from the company by 1605. Angered at the loss of so much (potential) profit, he decided to get his revenge on the company using a unique financial strategy.
He and either other people founded a company (what would now be called a “dummy corporation”) to secretly trade in VOC shares in an effort both to make money as well as to destroy the VOC’s profitability by driving down the share prices. Le Maire used a unique form of trade called the short, more specifically what would be known as “naked short selling” today. In essence, he sold something he did not own (shares in the company) to someone based on the premise that he would buy those things in the future when they would (hopefully for Le Maire’s purposes) be cheaper than they are today.
In other words, he (or more accurately, his company) sold people the promise to buy something in the future (VOC stock). It’s still a kind of gamble or wager because if the future price of stock is higher then Le Maire now owes the other person money. But for the first time in history, people were now selling things that they did not own (and “naked” means that even their promises were unsecured) and making a profit off of them. Using machinations involving the French government, Le Maire indeed did conspire to lower the (future) price of VOC stock. If he had succeeded, he would have profited enormously without having to own (or buy) anything in the first place. In Le Maire’s case, his strategy backfired as the price of VOC stock went up and suddenly a lot of people were waiting for payment (in stocks) that Le Maire simply could not afford to buy. As a result, the Dutch government banned short selling (for a brief time, and then it was reinstated, a cycle that continues in modern economies today).
It’s worth noting here that in my post The Execution’s Face Is (Always) Well-Hidden, there will be a conference next month in Bucharest where the main speaker is a guy who made a lot of his fortune (and nearly bankrupted the British government in 1992) precisely by this method – short selling.
What distinguishes capitalism from sophisticated forms of gambling is the premise that something can be created from nothing. Unlike older forms of trading where either commodities or goods or services (or the promise thereof) were involved, now certain transactions could be done based on nothing but promises alone. Le Maire certainly did not invent short selling but he was the first one to try to use it in a big way.
Due to geopolitical and religious reasons, a royal from Holland, known in English as William of Orange took over the kingship of England, Scotland and Ireland (modern Britain) in the year 1688. Not only was this an act that spurred Britain to become firmly Protestant but it also firmly entrenched the Dutch ways of capitalism, trade and financing, which soon led to the ascension of the British Empire, up to and including dominance of North America (and later the formation of the United States and Canada). What few people remember today about William and Mary is that it was under their reign that the Bank of England was formed, the second oldest “Central Bank” in the world and the forerunner to the economic formula used all over the planet today, including here in Romania.
England’s crushing defeat by France, the dominant naval power, in naval engagements culminating in the 1690 Battle of Beachy Head, became the catalyst to England rebuilding itself as a global power. England had no choice but to build a powerful navy if it was to regain global power. No public funds available, and the credit of William III.’s government was so low in London that it was impossible for it to borrow the 1,200,000 (at 8 per cent) that the government wanted.
In order to induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The bank was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank-notes.
There are two key things to note here. One is that The Bank had exclusive control of the government’s debts or, in other words, a monopoly. Prior to this, the king (and government) could borrow money from individual people or even trade for it on the various bourses. Now the only institution that could lend money to the government was The Bank. Now the government could remain perpetually in debt and therefore “finance” all of its wars and other expenditures.
What The Bank (and its shareholders) received in exchange was exclusive access to the money itself. In other words, instead of people trading precious metals in the form of coins (aka “money”), now they began to trade in elaborately engraved pieces of paper, called bank notes in Britain and “bills” in American English. At first these notes/bills had to be backed by actual stockpiles of precious metals (gold and silver) but over time this was relaxed due to a concept called fractional reserve banking. In today’s economy, both Central Banks as well as “regular” banks need only have a small fraction of tangible assets on hand to “back” the notes that they issue (or in more modern times, entries in computers).
All economies today are based on two things. One is the elaborately constructed form of unsecured promises, in which monopoly corporations (banks) create money on their word alone. The second part is extremely elaborate and sophisticated trading in these promises, now reaching ever higher levels of the absurd in which computer programs interact with each other based on extremely complicated mathematic formulas. And it is this combination of mathematics and monopoly control of promises that has led to what we call the “economy” today. Another way to say it is that debt (future unsecured promises) and the trading thereof is now the sole source of “wealth”.
Of course people still grow potatoes and manufacture clothes and siphon oil and gold out of the ground but these activities are only the very bottom tier of modern finance. The way all of the very richest people and corporations in the world “earn” their wealth is by sophisticated manipulation of these unsecured promises. The reason the IMF is able to lend Romania billions of euros (and gain access to the country’s energy supply and natural resources, not to mention hijacking political control) isn’t because a group of people somewhere worked very hard and pooled their money and thus had enough “extra” to lend out.
On the contrary. Through hegemonic control of monopoly entities who granted themselves exclusive control of money itself, they are in essence doing nothing more than pushing a few buttons on a computer, transferring empty promises in exchange for real goods, services and commodities. People actually went hungry in Romania in the 1980s because Ceausescu was selling off the grain harvest in order to pay back these electrons. Nowadays the salaries of teachers, doctors and police officers (not to mention judges) are slashed, taxes are increased, services are reduced (including health care) and for what? To “pay back” what doesn’t really exist in the first place.
If every potato, shoe, car, mobile phone, coin, bank note, piece of land, tree, animal, liter of water, petroleum and milk was sold right now today across the entire planet, in other words if every single possible resource was “liquidated” and turned into cash, it still would not be enough money to pay back all of the debts owed to banks worldwide. The only reason the system continues to exist is because ever more distant future promises are being sold and traded. Just three days ago I read that Britain is considering selling 100 year bonds for this very purpose.
But one day, whether tomorrow, next month or in 100 years, there won’t be enough future promises to sell and trade anymore and for many, many people, a hard rain indeed is going to fall.