Friday, December 18, 2020

"How Bills of Exchange Went from a Way to Bring Textile Proceeds Home to the 'Foundation of Modern Commercial Banking'"

Bloomberg Opinion columnist Virginia Postrel writing at the Volokh Conspiracy (Eugene Volokh, Professor UCLA School of Law, comfy endowed chair) hosted at, December 4:

Many textile merchants wound up as bankers. These useful IOUs were a major reason why.

This is my last guest post of the week, and I'd again like to thank Eugene Volokh for inviting me to share some selections from The Fabric of Civilization. These posts on "social technologies" are all taken from chapter five, "Traders."

Thomas Salmon had a problem. As a tax collector in Somerset, Salmon had amassed thousands of pounds of gold and silver that needed to get to London. But the England of 1657 had no checking accounts, wire transfers, or armored cars. Physically traveling with that much specie was difficult and dangerous. What was Salmon to do?

He took the coins to local cloth makers, known as clothiers. In return, they gave him slips of paper called bills of exchange. These bills worked like checks, but instead of drawing on a bank they told a London businessman named Richard Burt to give Salmon cash. Burt bought woolen cloth from scattered producers and sold it to London merchants, taking a commission from the sale.

When he sold their goods, Burt kept the clothiers' credits on his books, and they drew down their accounts with bills of exchange. A Somerset clothier could buy household provisions from a local merchant and pay with a bill of exchange. The merchant would cash the bill on a trip to London or, more likely, use it to pay his own suppliers who had dealings there. Accepting coins from the tax man was yet another way for clothiers to cash in their credits. Salmon would carry the bills of exchange to London, swap them for specie at Burt's, and deposit the money at the treasury. An institution created to serve the textile industry had become crucial to the finances of the British Crown.

Originating with Italian textile merchants in the 13th century, bills of exchange have been called "the most important financial innovation of the High Middle Ages." They started as a way for merchants to transfer proceeds from the fairs at Champagne back to the home office. Written in a kind of shorthand, these slips of paper were essentially form letters telling an agent, usually a bank, in another city to pay someone a certain amount; when a merchant issued a bill of exchange, his local bank sent a notice to its foreign branch, telling it to honor the bill when presented. Bills of exchange were not official, state-sanctioned documents, designed in advance but, rather, social technologies that evolved through trial and error. Their usefulness depended on connections and trust....


Previously in this series of excerpts: