If required to settle every payment immediately, trade can become a very capital-intensive business despite its small margins. This would have been especially taxing back when far longer travel times would have meant inventories had to be held for longer. When metal coins made up most of the money supply, immediate settlement of purchases would have been an inconvenience to say the least. These undesirable circumstances are avoided by the use of trade credit. By paying for merchandise in bills or similar credit instruments, a purchase can be made without immediately available funds. Medieval merchants, frequenting the fairs in which so much business was conducted, used such instruments and their associated settlement procedures to avoid the use of coined money in trade.

Fairs

            Besides commercial cities, trade was conducted at medieval fairs of which those of the Champagne region of France were among the most notable. Fairs traded in certain products on certain days. For example, the Champagne fairs had two parts, one in which Flemish cloth was sold to predominantly Italian buyers and another in which the Italians sold spices and medicaments to the Flemish merchants.

             The Champagne fair was just one in a circuit attended by merchants. Together with others in England and Flanders, the fairs would be visited by essentially the same general group of merchants. Admittedly, it was difficult for a single merchant to attend them all, though some did try. Nonetheless, the fairs in Champagne and Flanders were close enough that the same merchants would attend, meaning these traders were almost always in constant contact.

Settlement

             Merchants would settle debts at the conclusion of a fair rather than making payments every time they bought or sold merchandise. In the case of the Champagne fairs, a Flemish merchant would likely accumulate a surplus early in the fair when they sold their cloth, and would use these funds to buy spices later in the fair. Italians would conversely run deficits when buying cloth but would only pay at settlement after they had sold their inventories of spices to Northern buyers. Because settlement only occurred once at the end of a fair, there was no need to transact so often in coin ‘intra-fair’.

            Still, at the conclusion of a fair, some merchants might still have deficits and others would have surpluses. This was particularly true for merchants who specialized in a single product, who might be either buyers or sellers, but not both, at any single fair. These traders could not benefit from the offsetting transactions that other merchants could and would have large net balances at the close of business. Generally, settlement in cash was not desirable for a merchant who had bought more than he sold, perhaps in anticipation of the next fair in a circuit. Carrying cash made the merchants’ business more capital intensive than it needed to be. Similarly, merchants with a surplus might be inconvenienced by receiving a large payment in coins to carry with him to the next fair or send back home, with all the attendant risks.

            There was a workaround though. Firstly, note that the volume of surplus balances matched the deficits of others. Also, merchants with surpluses after one fair might expect to run a deficit at a future one in the circuit. Similarly, merchants in deficit may have spent more on inventories in one fair in anticipation of demand and strong sales elsewhere. Conveniently, the same merchants often attended the same fairs throughout the year. So, conditions were ripe for a credit solution to the problem of settling balances after the end of an individual fair.

Credit

            At settlement, a merchant owing more than he was owed might roll over his obligations by borrowing the amount in which he was in deficit from another merchant. In this way, the merchants who had sold more than they bought, and more than they needed for transportation and other costs, financed the trade of other traders in the opposite position. In effect, a financial market developed where this form of ‘inter-fair’ credit was extended by and amongst the merchants. Eventually, specialized bankers became important too.

            This credit initially took the form of a ‘fair letter’ at least as early as around 1200. These were transferable obligations between merchants. They were bearer instruments, allowing them to be traded in more easily; any holder could present them for payment. This transferability made it easier to settle payments since a fair letter could be used to satisfy a payment rather than cash. The final fair of a year would see many of these fair letters settled but it was possible to carry balances into the new year. In 1311, the French king Philippe IV fixed the price of this financing at 15% per year.

            Fair letters sometimes involved repayment in a currency different from that in which the indebtedness originated. This implies that the repayment would take place after the conclusion of a different fair elsewhere, in the future. The combination of a foreign exchange transaction with a credit one was similar to later medieval bills of exchange. Further, the positive balances of other merchants came to be considered a form of deposits, particularly when bankers became involved in this emerging credit market.

Bankers

            The medieval fairs, including those of Champagne, became less relevant in the 14th century. As the medieval period came to an end, trade shifted to a permanent home in cities and away from the circuit of fairs. Still, they continued to be used as a meeting of merchants to settle accounts. Their financial role outlived their role as marketplaces for other articles and commodities.

             In parallel to the changing role of the medieval fair, some merchants transitioned into banking and away from trading for their own account. They were now financing the trade of others. The market for fair letters, deposits, and bills of exchange was attracting parties with otherwise no interest in the fairs, merchants of money rather than merchandise. At this point, the going rate for credit was 8-12% per year, or approximately 2-3% from one major fair to the next.

             An example of such a merchant banking firm was the Salviati firm in Lyon in the 16th century. They were essentially providing credit to merchants through overdraft facilities and then collecting on this credit by offsetting payments thereafter, often soon thereafter, and usually such transactions with clients had a recurring nature, typical of trade finance. However, it was also common for depositors to keep deposits with banks like the Salviati for long periods and for debts to remain outstanding for years, typically through regular renewals. So, the financing of trade could be done on a longer-term basis.

Clearing Payments

            Still, settling debts between merchants was done by frequent meetings. As alluded to earlier, the fairs remained relevant in the market for credit. In the Middle Ages, ‘payment fairs’ were situated next to merchandise fairs and these survived into the time period of the Salviati firm of Lyon. Indeed, even in the 15th and 16th centuries, Lyon hosted a fair where short-term credit obligations were settled in the manner of a primitive clearing house. Payees would present their bills for payment which would then be settled. This was done in such a way as to reduce the net payments to be made. Merchants would use these occasions to cancel offsetting debts or substitute creditors and debtors such that if one person owed and was owed a sum of money from different people, he might try to get them to simply pay each other directly, minimizing the number of payments.

Lesson

            Coined money may have been the most common form of money before the advent of banking but it was only resorted to reluctantly. Merchants were loath to carry physical coins and immediately settle purchases in metal. It was much better to finance these purchases over time and this was not such a bold demand when there were many merchants holding temporary surpluses who would be happy to accept some bill or other instrument over metal coins. Eventually, this gave rise, not just to the instruments themselves but to banks and bankers who traded in these instruments rather than any merchandise. So often, and especially in the Late Middle Ages, it was the needs of merchants that prompted financial developments.

More from the Tontine Coffee-House

           Read more about medieval fairs and about the instruments used. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Geva, Benjamin. “The order to pay money in medieval continental Europe.” Money in the Western Legal Tradition, 28 Jan. 2016, pp. 409–440.

2.      Kohn, Meir. “Money, Trade, and Payments in Preindustrial Europe.” Handbook of the History of Money and Currency, edited by Stefano Battilossi et al., Springer, Singapore, 2020, pp. 223–244.

3.      Matringe, Nadia. “The Fair Deposit: Credit Reallocation and trade finance in the Early Modern Period.” Annales. Histoire, Sciences Sociales, vol. 72, no. 2, June 2017, pp. 275–315.

4.      Nicholas, David. Medieval Flanders. Routledge, 2014.

External links to recommended reading are affiliate links. When you click on links to various merchants posted here and make a purchase, this will result in The Tontine Coffee-House earning a commission.

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