Merchants are regularly presented with dangers that are distinct from ordinary and obvious market dangers such as the movement of prices up and down. Besides these, they also face all sorts of risks arising from the people they must trust in order to conduct business, namely counterparty risks. Today, and for centuries, industries rely on the law and the rules and enforcement mechanisms of industry bodies to reduce counterparty risk. Nevertheless, these are not always available or sufficient. Documents dating to the 11th century reveal how social capital was crucial to measuring and reducing counterparty risk in the Medieval world.
Maghrib
A cache of mercantile documents dating to the 11th century kept in a synagogue storeroom, or genizah, in Cairo had been known of for centuries but received little attention until about thirty years ago. The files kept there included contracts, price lists, letters, and accounts. These documents have been the subject of considerable analysis and different and opposing interpretations of the trade they describe have been supported using the same records. A philologist reads them differently than an economic historian for example. To this day therefore, the trading arrangements of the period are subject to uncertainty, but it is clear that in the absence of certain modern institutions, trust was particularly critical to trade back then.
These genizah documents were written by Jewish traders active in the Muslim parts of the Mediterranean, particularly the Western Mediterranean, from the 10th to the 12th centuries. This area was known as the maghrib, the westernmost parts of the Islamic world. The Jewish merchant community here largely came from Baghdad in the Abbasid Caliphate. They left that part of the world as it became less stable in the 10th century and settled in North Africa, particularly in Tunisia, which remained prosperous under the Fatimid Caliphate, and then scattered from there. Tunisia was, together with Egypt and Sicily, a foremost trading center of the Mediterranean.
These ‘Maghribi’ merchants were fairly prosperous. They typically controlled inventories worth between a few hundred and a few thousand dinars; by comparison, monthly expenses for a middle-class family might be between just two and three dinars at this time. These inventories spanned wares and commodities of various types, from flax to copper and olive oil to textiles.
Besides their inventories, the merchants possessed relations with fellow merchants that continued for generations after the population had scattered. While the recovered letters mostly reveal communications between members of this Jewish mercantile community there are also ample examples of close partnerships between Jewish merchants and Christians and Muslims.
Trading
Trade was growing in the second half of the Middle Ages and, at least in the Mediterranean, trade was relatively free of restrictions on the movement of goods, people, or money. Even if the judicial system was not always effective, a body of merchant law developed in this period, bringing some order and custom to an otherwise unrestricted trade. Nevertheless, substantial uncertainties remained, resulting from volatility in prices and slow and unreliable communication.
In order to operate in such a time and place without excessive costs and to more profitably manage trading across several ports, merchants relied extensively on agents. Indeed, already at this time, a merchant could be sedentary, operating out of a single place and some of the most successful merchants were sedentary. However, they could not achieve such a standing on their own. Their agents were bound, albeit only informally in most cases, under an agreement known as a suhba, a form of partnership where the parties’ performed services for one another on a reciprocal basis. Local agents might assist a merchant in their trade far from home in exchange for that merchant’s assistance later on. In the case of a particularly successful merchant, a recommendation from them could be more valuable than almost any other sort of compensation or reciprocation.
Principals necessarily place a lot of trust in the agents they employ, such as those transporting merchandise on their behalf. Besides this, agents might also be employed to handle financial transactions, like paying customs duties, selling product, and offering trade credit to buyers, on behalf of a merchant located far away. Obviously, an agent may prove unreliable, either for want of creditworthiness or propriety and the ease with which an offending agent could flee and the slow pace of communication made relying on courts less effective. Still, the genizah merchant documents reveal ordinary legal procedures were resorted to by merchants in order to set things right.
Social Capital
Remarkably considering the degree of reliance of a merchant on his agent, the papers of the Maghribi merchants suggest they entered into and terminated agency relationships often, suggesting a rather casual usage of agent’s services. Arrangements were also often made without written contracts; the law recognized both informal, non-contractual, partnerships and those with formal contracts but the former seem far more common. All this might seem unexpected given the trust which must have been placed in agents. Yet, disputes seem rare compared to the volume of transactions recorded.
If not the length of relationships or legal formality, what protected the merchant from the fraud or bankruptcy of an agent? To a large extent, the answer is sizing up the agent’s social capital. Merchants seem to have liberally exchanged information and reciprocating the receipt of information was customary in business life. Not every piece of news was treated as a closely held secret. Rather, travelling merchants and agents or those in communication by letters circulated news across the Mediterranean. Further, merchants were commonly friends or participated in the same civic or religious institutions, providing more venues for exchanging information.
Merchants prioritized their social standing or jah, and this standing determined a merchant’s access to and ability to disseminate information. Some merchants were so entrenched in the trade of a particular city that they would know a lot about the reliability of numerous agents in the area even if they themselves had not done business with them. For example, Ibn Awkal, of Cairo, was considered one of the most influential merchants at the time and his opinion of any trader carried a lot of weight.
The extent to which the reputation of an agent could be measured and this reputation made widely known protected merchants. It made it easier for principals to avoid bad actors if the experiences of other merchants circulated widely. Exchanging information made collective punishment for bad actors a possibility. A corrupt agent could be embargoed, if only voluntarily rather than by force of law. For example, when a Jerusalem-based agent named Abun ben Zedaka was accused of misusing money in 1055, he lamented being cut off from business with others.
In another trust-building mechanism, agents were expected to co-invest with their principal merchant. Returns were not always split equally. Reputation mattered immensely; agents were keen to preserve this reputation, even if doing so resulted in a loss to them. Around the time of the Abun ben Zedaka case, a different agent handling the sale of pepper to Spanish merchants happened to receive a lower price for the principal’s pepper than he later secured in a sale of his own pepper. To avoid any suspicion, this merchant, Khalluf ben Musa, shared his own elevated profits with the principal. He did this even though, as he explained, he did not wish to conduct any trade with that person in the future. In another example, the Palermo-based nephew of Ibn Awkal similarly transferred some profit from his own account to make up for losses he sustained in handling some bales of flax for his influential uncle in Cairo.
Courts
The old correspondence makes clear that whatever the role of communication in circulating information about an agent’s reputation, there was no formal mechanism to exclude them from trade. No formal body existed to sanction them and warn other merchants. Unsurprisingly, whatever the importance of reputation, it was not the case that the only penalty for fraud was becoming an outcast.
The Maghribi merchants’ documents make clear that the ordinary legal system had to be resorted to, even in the case of disputes between partners in an informal trading arrangement. While a fleeing agent may escape the law, it was not convenient or permanent; ordinary courts would allow judgements to be imported from elsewhere. Jewish communities in the Muslim world also had their own parallel court system utilized by the Maghribi.
Guilds
Clearly, though the Maghribi merchants were competitors in one respect, they cooperated in others, such as the exchange of information. Comparisons have been made between the Maghribi and European merchants. The latter formed their own communities; they too relied on both informal and formal legal arrangements and enforcement mechanisms. One difference is the organization of merchants of the same nation; European merchants organized guilds to facilitate trade, organizations with formal membership.
Guilds could protect merchants from other forms of abuse. A merchant guild could unite to protect members from such abuses inflicted by foreign rulers who might be disinclined to favor a foreign merchant community. Guilds also served to support trade between unfamiliar people without resorting to the legal system. Many industries today have their own professional organizations, complete with credentialization and arbitration standards, a sort of trade body not entirely different from a merchant guild. This model would stand for centuries. Backed by the navies of their respective city states, Italian merchants displaced the Maghribi in the Mediterranean and the latter immigrated once more, this time to the Indian ocean where they carried on their trading for some time longer.
Lesson
Trade became more complex and conducted at tremendous distance between buyer and seller as the Dark Ages gave way to a revitalized Mediterranean trade. New practices had to develop in light of these changes. In fact, there has been a growing trend towards formality and professionalization in commercial life ever since. The importance of social capital to the Maghribi merchants may not have been replaced but it has been complemented by other institutions. Still, despite all the developments and accompanying formality in commercial life, social capital is a hidden asset of the merchant but among the most critical.
More from the Tontine Coffee-House
Read about merchant communities in the Pearl River Delta in China and the trading activities of sailors on 17th century voyages. 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. Bernstein, Lisa. “Contract Governance in Small-World Networks: The Case of the Maghribi Traders.” Northwestern University Law Review, vol. 113, no. 5, 2019, pp. 1009–70.
2. Edwards, Jeremy, and Sheilagh Ogilvie. “Contract Enforcement, Institutions and Social Capital: The Maghribi Traders Reappraised.” Economic History Review, vol. 65, no. 2, 2012, pp. 421–44.
3. Greif, Avner. “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition.” American Economic Review, vol. 83, no. 3, June 1993, pp. 525–48.
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Matthew Miller