InEuropean history, thecommercial revolution saw the development of a European economy – based on trade – which began in the 11th century AD and operated until the advent of theIndustrial Revolution in the mid-18th century. Beginningc. 1100 with theCrusades, Europeans rediscovered spices, silks, and other commodities then rare in Europe.Consumer demand fostered more trade, and trade expanded in the second half of the Middle Ages (roughly 1000 to 1500 AD). Newly forming Europeanstates, throughvoyages of discovery, investigated alternative trade routes in the 15th and 16th centuries, which allowedEuropean powers to build vast, new international trade networks. Nations also sought new sources of wealth and practicedmercantilism andcolonialism. The Commercial Revolution is marked by an increase in general commerce, and in the growth of financial services such as banking, insurance, and investing.
The term itself was used byKarl Polanyi in hisThe Great Transformation: "Politically, the centralized state was a new creation called forth by the Commercial Revolution...".[1] Later the economic historianRoberto Sabatino Lopez,[2] used it to shift focus away from the EnglishIndustrial Revolution.[3] In his best-known book,The Commercial Revolution of the Middle Ages (1971, with numerous reprints), Lopez argued that the key contribution of the medieval period toEuropean history was the creation of a commercial economy between the 11th and the 14th century, centered at first in the Italo-Byzantine easternMediterranean, but eventually extending to theItalian city-states and over the rest of Europe. This kind of economy ran from approximately the 14th century through the 18th century.[4]Walt Whitman Rostow placed the beginning "arbitrarily" in 1488, the year the first European sailed around theCape of Good Hope.[5] Most historians, including scholars such asRobert Sabatino Lopez,Angeliki Laiou, Irving W. Raymond, andPeter Spufford indicate that there was a commercial revolution of the 11th through 13th centuries, or that it began at this point, rather than later.[6][7][8][9]
Italy first felt huge economic changes in Europe from the 11th to the 13th centuries. Typically there was:
In recent writing on the city states, American scholarRodney Stark emphasizes that they married responsive government, Christianity and the birth of capitalism.[10] He argues that Italy consisted of mostly independent towns, who prospered through commerce based on early capitalist principles and kept both direct Church control and imperial power at arm's length.
Cambridge University historian and political philosopher Quentin Skinner[11] has pointed out howOtto of Freising, a German bishop who visited central Italy during the 12th century, commented that Italian towns had appeared to have exited from feudalism, so that their society was based on merchants and commerce. Even northern cities and states were also notable for theirmaritime republics, especially theRepublic of Venice andGenoa.[12] Compared to absolutist monarchies or other more centrally controlled states, the Italian communes and commercial republics enjoyed relative political freedom conducive to academic and artistic advancement. Geographically, and because of trade, Italian cities such as Venice became international trading and banking hubs and intellectual crossroads.
Harvard historianNiall Ferguson[13] points out that Florence and Venice, as well as several other Italian city-states, played a crucial innovative role in world financial developments, devising the main instruments and practices of banking and the emergence of new forms of social and economic organization.
It is estimated that the per capita income of northern Italy nearly tripled from the 11th century to the 15th century. This was a highly mobile, demographically expanding society, fueled by the rapidly expandingRenaissance commerce.
In the 14th century, just as the Italian Renaissance was beginning, Italy was the economic capital of Western Europe: the Italian States were the top manufacturers of finished woolen products. However, with theBlack Death in 1348, the birth of the English woolen industry and general warfare, Italy temporarily lost its economic advantage. However, by the late 15th century Italy was again in control of trade along the Mediterranean Sea. It found a new niche in luxury items like ceramics, glassware, lace and silk as well as experiencing a temporary rebirth in the woolen industry.
During the 11th century in northern Italy a new political and social structure emerged: the city-state orcommune. The civic culture which arose from thisurbs was remarkable. In some places where communes arose (e.g. Britain and France), they were absorbed by the monarchical state as it emerged. They survived in northern and central Italy as in a handful of other regions throughout Europe to become independent and powerful city-states. In Italy the breakaway from their feudal overlords occurred in the late 12th century and 13th century, during theInvestiture controversy between the Pope and theHoly Roman Emperor:Milan led the Lombard cities against the Holy Roman Emperors and defeated them, gaining independence (battles of Legnano, 1176, andParma, 1248; seeLombard League).
Similar town revolts led to the foundation of city-states throughout medieval Europe, such as in Russia (Novgorod Republic, 12th century), in Flanders (Battle of Golden Spurs, 14th century) in Switzerland (the towns of theOld Swiss Confederacy, 14th century), in Germany (theHanseatic League, 14th–15th century), and inPrussia (Thirteen Years' War, 15th century).
Some Italian city-states became great military powers very early on. Venice and Genoa acquired vast naval empires in the Mediterranean and Black Seas, some of which threatened those of the growing Ottoman Empire. During theFourth Crusade (1204), Venice conquered a quarter of the Byzantine Empire.
TheMaritime Republics were one of the main products of this new civic and social culture based on commerce and exchange of knowledge with other areas of the world outside western Europe. TheRepublic of Ragusa and theRepublic of Venice, for example, had important trade communications with the Muslim and Hindu world and this helped the initial development of the ItalianRenaissance.
By the late 12th century, a new and remarkable society had emerged in Northern Italy, rich, mobile, and expanding, with a mixed aristocracy and urbanborghese (burgher) class, interested in urban institutions and republican government. But many of the new city-states also housed violent factions based on family, confraternity and brotherhood, who undermined their cohesion (for instance theGuelphs and Ghibellines).
By 1300, most of these republics had become princely states dominated by aSignore. The exceptions wereVenice,Florence,Lucca, and a few others, which remained republics in the face of an increasingly monarchic Europe. In many cases by 1400 the Signori were able to found a stable dynasty over their dominated city (or group of regional cities), obtaining also a nobility title of sovereignty by their formal superior, for example in 1395Gian Galeazzo Visconti bought for 100,000 goldflorins the title ofDuke of Milan from the emperorWenceslaus.
In the fourteenth and fifteenth centuries,Milan, Venice, andFlorence were able to conquer other city-states, creating regional states. The 1454Peace of Lodi ended their struggle for hegemony in Italy, attaining abalance of power and creating the conditions for the artistic and intellectual changes produced by theItalian Renaissance.
The deterioration of the climate that brought about the end of themedieval warm period (or medieval weather anomaly) caused an economic decline at the beginning of the 14th century (seeGreat Famine). However, demographic expansion continued until the arrival of theBlack Death epidemic in 1347, when ca. 50% of the European population was killed by the plague. The economic effects of a labor shortage actually caused wages to rise, while agricultural yields were once again able to support a diminished population. By the beginning of the 15th century, the economic expansion associated with the commercial revolution in earlier centuries returned in full force, aided by improvements in navigation and cartography.
Geopolitical, monetary, and technological factors drove the Age of Discovery. During this period (1450–17th century), the European economic center shifted from the IslamicMediterranean to Western Europe (Portugal, Spain, France, the Netherlands, and to some extent England). This shift was caused by the successfulcircumnavigation of Africa, which opened up sea-trade with the east: after Portugal'sVasco da Gama rounded theCape of Good Hope and landed inCalicut, India in May 1498, a new path of eastern trade was possible, ending the monopoly of the Ottoman Turks and the Italian city-states.[14] The wealth of theIndies was now open for the Europeans to explore; thePortuguese Empire was one of the early European empires to grow from spice trade.[14] Following this, Portugal became the controlling state for trade between east and west, followed later by the Dutch city ofAntwerp. Direct maritime trade between Europe and China started in the 16th century, after the Portuguese established the settlement ofGoa, India in December 1510, and thereafter that ofMacau in southern China in 1557. Since the English came late to the transatlantic trade,[15] their commercial revolution was later as well.
In 1453, theOttoman Turks took overConstantinople, which cut off (or significantly increased the cost of) overland trade routes between Europe and the Far East,[16] so alternative routes had to be found. English laws were changed to benefit the navy, but had commercial implications in terms of farming. These laws also contributed to the demise of theHanseatic League, which traded in northern Europe.[17] Because of theReconquista, the Spanish had a warrior culture ready to conquer still more people and places, so Spain was perfectly positioned to develop theirvast overseas empire.[18]Rivalry between the European powers produced intense competition for the creation of colonial empires, and fueled the rush to sail out of Europe.[19]
The need for silver coinage also affected the desire for expanded exploration as silver and gold were spent for trade to the Middle and Far East. The Europeans had a constant deficit in that silver and gold coin only went one way: out of Europe, spent on the very type of trade that they were now cut off from by the Ottomans.
Another issue was that European mines were exhausted of silver ore and gold. What ore remained was too deep to recover, as water would fill the mine, and technology was not sufficiently advanced enough to successfully remove the water to get to the ore or gold.[20]
A second argument is that trade during the youth of the commercial revolution blossomed not due to explorations for bullion (gold and silver coinings) but due to a newfound faith in gold coinage. Italian city-states such as Genoa and Florence (where the first gold coins began to be minted in 1252) and kingdoms such as the Kingdom of Sicily routinely received gold through such trading partners as Tunisia and Senegal.[21] A new, stable and universally accepted coinage that was both compatible with traditional European coinage systems and serviced the increased demand for currency to facilitate trade made it even more lucrative to carry out trade with the rest of the world.
From the 16th to 18th centuries, Europeans made remarkable maritimeinnovations. These innovations enabled them to expand overseas and set up colonies, most notably during the 16th and 17th centuries. They developed newsail arrangements for ships, skeleton-based shipbuilding,[22] the Western "galea" (at the end of the 11th century), sophisticated navigational instruments, and detailedcharts and maps.After Isaac Newton published thePrincipia, navigation was transformed, because sailors could predict the motion of the moon and othercelestial objects using Newton's theories of motion.[23] Starting in 1670, the entire world was measured using essentially modern latitude instruments. In 1676, the British Parliament declared that navigation was the greatest scientific problem of the age and in 1714 offered a substantialfinancial prize for the solution to finding longitude. This spurred the development of themarine chronometer, thelunar distance method and the invention of theoctant after 1730.[24] By the late 18th century, navigators replaced their prior instruments with octants and sextants.
Significant contributors to European exploration include PrinceHenry the Navigator of Portugal, who was the first of the Europeans to venture out into the Atlantic Ocean, in 1420. Others areBartolomeu Dias, who first rounded theCape of Good Hope;Vasco da Gama, who sailed directly to India from Portugal;Ferdinand Magellan, the first to circumnavigate the Earth;Christopher Columbus, who significantly encountered the Americas;Jacques Cartier, who sailed for France, looking for theNorthwest Passage;[25] and others.
The economy of theRoman Empire had been based onmoney, but after the Empire's fall, money became scarce; power and wealth became strictly land based, and localfiefs were (at least theoretically) self-sufficient. Because trade was dangerous and expensive, there were not many traders, and not much trade. The scarcity of money did not help;[26] however, the European economic system had begun to change in the 14th century, partially as a result of theBlack Death, and theCrusades.[27]
Banks, stock exchanges, and insurance became ways to manage the risk involved in the renewed trade. New laws came into being.[clarification needed] Travel became safer as nations developed. Economic theories[clarification needed] began to develop in light of all of the new trading activity. The commercial revolution is also marked by the formalization of pre-existing, informal methods of dealing with trade and commerce.
Spain legally amassed approximately 180tons of gold and 8200 tons of silver through its endeavors in theNew World, and another unknown amount through smuggling,[28] spending this money to finance wars and the arts. The spent silver, suddenly being spread throughout a previously cash starved Europe, caused widespread inflation.[29] The inflation was worsened by a growing population but a static production level, low employee salaries and a rising cost of living. This problem, combined withunderpopulation (caused by theBlack Death), affected the system of agriculture. The landholding aristocracy suffered under the inflation, since they depended on paying small, fixed wages to peasant tenants that were becoming able to demand higher wages.[30] The aristocracy made failed attempts to counteract this situation by creating short-term leases of their lands to allow periodic revaluation of rent. Themanorial system (manor system of lord and peasant tenant) eventually vanished, and the landholdingaristocrats were forced to sell pieces of their land to maintain their style of living.[31] Such sales transferred ownership to wealthy commoners, who wanted to buy land and thereby increase their social status. Former "common lands" were fenced by the landed gentry, a process known as "enclosure" which subsidized the cost of raising livestock (mainly sheep's wool for thetextile industry). This "enclosure" forced the peasants out of rural areas and into the cities, resulting in urbanization. The increase in the availability of silver coin allowed for commerce to expand in numerous ways.[32]
Various legal and religious developments in the late Middle Ages allowed for development of the modern banking system at the beginning of the 16th century. Interest was allowed to be charged, andprofits generated from holding other people's money.
Banks in the Italian Peninsula had great difficulty operating at the end of the 14th century, for lack of silver and gold coin.[33] Nevertheless, by the later 16th century, enough bullion was available that many more people could keep a small amount hoarded and used ascapital.[34]
In response to this extra available money, northern European banking interests came along; among them was theFugger family. The Fuggers were originally weavers and cloth merchants, but soon became involved in banking, charging interest, and other financial activities. They dealt with everyone, from small-time individuals, to the highest nobility. Their banks even loaned to the emperors and kings, eventually going bankrupt when their clients defaulted.[35] This family, and other individuals, used Italian methods which outpaced theHanseatic League's ability to keep up with the changes occurring in northern Europe.[36]
Antwerp had one of the first money exchanges in Europe, aBourse, where people could change currency. After theSiege of Antwerp (1584-1585), the majority of business transactions were moved to Amsterdam. TheBank of Amsterdam, following the example of a privateStockholm corporation, began issuingpaper money to lessen the difficulty of trade, replacing metal (coin and bullion) in exchanges. In 1609 theAmsterdamsche Wisselbank (Amsterdam Exchange Bank) was founded which made Amsterdam the financial center of the world until theIndustrial Revolution. In a notable example of crossover between stock companies and banks, theBank of England, which opened in 1694, was a joint-stock company.[37]
Banking offices were usually located near centers of trade, and in the late 17th century, the largest centers for commerce were the ports ofAmsterdam, London, andHamburg. Individuals could participate in the lucrativeEast India trade by purchasing bills of credit from these banks, but the price they received for commodities was dependent on the ships returning (which often did not happen on time) and on the cargo they carried (which often was not according to plan). The commodities market was very volatile for this reason, and also because of the many wars that led to cargo seizures and loss of ships.
Trade in this period was a risky business: war, weather, and other uncertainties often kept merchants from making a profit, and frequently an entire cargo would disappear all together. To mitigate this risk, the wealthy got together to share the risk through stock: people would own shares of a venture, so that if there was a loss, it would not be an all consuming loss costing the individual investor everything in one transaction.[38]
Other ways of dealing with the risk and expense associated with all of the new trade activity include insurance andjoint stock companies which were created as formal institutions. People had been informally sharing risk for hundreds of years, but the formal ways they were now sharing risk was new.[39]
Even though the ruling classes would not often directly assist in trade endeavors, and individuals were unequal to the task,[40] rulers such asHenry VIII of England established a permanent Royal Navy, with the intention of reducing piracy, and protecting English shipping.[41]
Stock exchanges were developed as the volume of stock transactions increased. The LondonRoyal Exchange established in 1565 first developed as a securities market, though by 1801 it had become a stock exchange.[39]
HistorianFernand Braudel suggests that inCairo in the 11th-century Muslim and Jewish merchants had already set up every form oftrade association and had knowledge of every method of credit and payment, disproving the belief that these were invented later by Italians. In 12th century France thecourratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the firstbrokers. In late 13th centuryBruges commodity traders gathered inside the house of a man calledVan der Beurse, and in 1309 they became the "Bruges Beurse", institutionalizing what had been, until then, an informal meeting. The idea quickly spread aroundFlanders and neighboring counties and "Beurzen" soon opened inGhent andAmsterdam.[42]
"In the middle of the 13th centuryVenetian bankers began to trade ingovernment securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds."[42] Bankers inPisa,Verona,Genoa andFlorence also began trading in government securities during the 14th century. This practice was only possible, because these independent city states were not ruled by a duke but a council of influential citizens. The Dutch later startedjoint stock companies, which letshareholders invest in business ventures and get a share of their profits – or losses. In 1602, theDutch East India Company issued the first shares on theAmsterdam Stock Exchange. It was the first company to issue stocks and bonds.[43]
TheAmsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneeredshort selling,option trading, debt-equity swaps,merchant banking, unittrusts and otherspeculative instruments, much as we know them."[44]
Insurance companies were another way to mitigate risk. Insurance in one form or another has been around as far back as there are records. What differed about insurance going into the 16th and 17th centuries was that these informal mechanisms became formalized.
Lloyd's of London came into being in 1688 in English coffee shops that catered to sailors, traders, and others involved in trade. Lloyd's coffeehouse published a newspaper, which gave news from various parts of the world, and helped the underwriters of the insurance at the coffeehouse to determine the risk.[45] This innovation was one of many that allowed for the categorization of risk. Another innovation was the use of ship catalogs and classifications.
Other forms of insurance began to appear as well. After theGreat Fire of London,Nicholas Barbon began to sell fire insurance in 1667.[46]
Laws were changed to deal with insurance issues, such asl'Ordonnance de la Marine (by Colbert in 1681).[47]
As the economy grew through the commercial revolution, so did attempts to understand and influence it.Economic theory as a separate subject of its own came into being as the stresses of the new global order brought about two opposing theories of how a nation accumulates wealth:mercantilistic andfree-trade policies. Mercantilism inflamed the growing hostilities between the increasingly centralized European powers as the accumulation of precious metals by governments was seen as important to the prestige and power of a modern nation. This involvement in accumulating gold and silver (among other things) became important in the development of thenation-state. Governments' involvement in trade affected thenobility of western European nations, because increased wealth by non-nobles threatened the nobility's place in society[citation needed].
Governments became involved in trade directly through the granting of royal trade monopolies. For example,Walter Raleigh had been granted a trade monopoly byQueen Elizabeth, for the export ofbroadcloth and wine.[48] Ironically, competition between colonial powers led to their granting of trade monopolies to theEast India Companies.
Atriangular trade occurred in this period: between Africa, North and South America, and Europe; and it worked in the following way: Slaves came from Africa, and went to the Americas; raw materials came from the Americas and went to Europe; from there, finished goods came from Europe and were sold back to the Americas at a much higher price.
Due themassive die-off of the indigenous people, the Americas had a local deficit of labor required for the extraction of resources (such as gold and silver) and farming. Europe was also recovering from theBlack Plague and its resurgences, and population growth was slowed by intermittent warfare by European nations among themselves and against the Ottoman Empire. As a result of these limitations, the colonial powers were unable to satisfy the labor shortage through emigration, and theAtlantic Slave Trade was established to import the labor. This can be contrasted with theQing dynasty's colonization ofInner Asia, whereby the high population inChina proper produced policies that encouraged Han resettlement inDzungaria during the 18th century, andInner Mongolia andManchuria during the 19th century.
Laws began to change to deal with commerce, both internationally, and locally within individual countries.
In France, for example, theOrdinance of Marine of Louis XIV was published under the auspices of Colbert in 1691, and was the first complete code of maritime and commercial law; and "when we consider the originality and extent of the design and the ability with which it is executed, we shall not hesitate to admit that it deserves to be ranked among the noblest works that legislative genius and learning have ever accomplished."[49]
In England, theNavigation Acts were among the British effort to regulate trade.
The commercial revolution, coupled with other changes in theearly modern period, had dramatic effects on the globe.
For more than 2000 years theMediterranean Sea had been the focus of European trade with other parts of the world. This focus shifted to the Atlantic Ocean by routes south around theCape of Good Hope after 1488, and by trans-Atlantic trade after 1492. Older overland trade routes such as theSilk Road suffered economic decline due to the new maritime competition.
Christopher Columbus and theconquistadors, through their travels, were indirectly responsible for themassive depopulation of South America. They conquered theInca,Aztec, andMaya peoples and incorporated their territories into the Spanish Empire. Other Europeans similarly affected the peoples of North America as well.
An equally important consequence of the commercial revolution was theColumbian Exchange. Plants and animals moved throughout the world due to human movements. For example,Yellow fever, previously unknown in North and South America, was imported through water that ships took on in Africa.[50]Cocoa (chocolate), coffee, maize,cassava, and potatoes moved from one hemisphere to the other. Better food and more wealth allowed for larger families. Themigration of peoples from Europe to the Americas allowed for European populations toincrease. Higher caloric yields of the New World staple crops reduced the percentage of the workforce engaged in agricultural labor and accelerated urbanization.
Europe's commercial revolution also created a foundation of wealth needed for theIndustrial Revolution.[51] The expanding labor force was also redirected into nascent industrialization. Economic prosperity financed new forms ofcultural expression during this period.
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