03. The Commerical Revolution

On the background of the Renaissance and Reformation, Europe was experiencing what historians have identified as a “Commercial Revolution.” Resulting from numerous causes and conditions, the Commercial Revolution began in the 1400s and continued over the next four centuries. The most notable economic change taking place was the transition from town-centered and guild-based commercial activity to nation-centered economic systems. That is the focus of this reading.

The term commerce means financial activity, especially the buying and selling of goods and services on a large scale. The economic foundation upon which the Commercial Revolution was taking place was capitalism. The term “capital” identifies the resources (other than human and natural) used in the production of goods and services: money, tools, machines, buildings, etc. Ships, factories, banks, looms, farm tools, and the tools for any trade whatsoever are examples of capital resources. Capital is also often used to identify money that is used to make money: what may be called investments. Capitalism is the private ownership of the means of production, distribution, land, and capital. Capitalism is usually associated with free enterprise, the opportunity for any one person or group to set up and operate a business of any kind. Those who engage in capitalist enterprises are called entrepreneurs. The motive for such activity is profit. In a capitalist economy businesses succeed or fail in response to market forces. Market means the overall demand for goods and services. Thus, there is an element of risk involved as market forces can change. Under such conditions innovation is encouraged as entrepreneurs would compete to produce goods or provide services that consumers would want to buy. Throughout history most economic activity has been capitalist.

As we have seen, in Medieval Europe the legal identity of both individuals and institutions was defined by contract or charter. Thus, anyone wanting to start a business had to have a charter. A charter was granted by the local governing authority (king, nobleman, bishop, town government, etc) as a license and specified the conditions under which a business would operate. Thus it was that craft and trade guilds came into existence. Guilds held their corporate charters from the towns in which they operated. Over time the relationships between guilds and towns became increasingly close as each benefited from the other financially. Towns would grant the guilds monopolies of trades within them, thus prohibiting competition from those who sought to operate similar businesses. In the 1400s the combined conditions of growing population and inflation created pressures for business expansion. Guilds, not wanting competition, could legally prevent such expansion. On this background there developed a new form of economic enterprise – the “domestic” system or cottage industry.

Domestic industry began in England with the woolen textile trade. To avoid town-guild restrictions on new businesses, woolens entrepreneurs began to “put out” the labor to peasants in the countryside. The entrepreneurs provided the peasants with the spinning wheels and looms that they could use in their own cottages. The wool would be distributed for spinning in one cottage and then sent on to another cottage for weaving and to another still for dyeing. The labor was gender specific: women tended to be spinners; men were weavers. The peasants would receive a wage for their services, while the entrepreneur owned the process and the finished product which would then be sold. From the sale of the finished textiles, the entrepreneur would be able to purchase additional wool, wheels, and looms, pay his laborers, and still make a profit. A similar system began in the 1490s in France. In both countries the domestic system spread nation-wide. In time the domestic system would spread to other countries and to other areas of manufacture.

The domestic system created conditions that would be characteristic of commercial capitalism for the next 400 years. The entrepreneur was the owner and manager of the business. He – or others that he might employ as management – oversaw its operations, owned its capital, managed its accounts, and supplied and paid its laborers. As the industry might be dispersed over a wide range of territory, he most likely did not have personal contact with his employees. His employees were peasant wage-earners, whose prosperity, as did his, depended on market forces. Cottage peasants were an expandable labor force. As they were engaged in both agriculture and manufacturing, their numbers would be expanded in good times and reduced when demand was down. A peasant woman who might lose her employment as a spinner would still have a livelihood in farming.

A smart entrepreneur with ambition and a willingness to make investments and take financial risks could amass a huge fortune. Perhaps the most remarkable of the early modern entrepreneurs was Jacob Fugger (1455 - 1525) from Augsburg in southern Germany. Fugger’s father was a weaver who produced a new kind of cotton-based cloth called fustian. The demand for fustian was such that soon Fugger was producing the fabric for a wide market extending far beyond Germany. Jacob and his brothers saw the opportunity to expand the family business beyond textiles and began marketing Eastern trade goods (silks and spices) obtained in Venice. Establishing an office in Venice, Jacob learned such business practices as double-entry (accounts of credits and debits) bookkeeping which heretofore had been unknown in Germany. Profits were invested back into the business and also invested in new opportunities – namely mining, shipping, and banking. Branches of the Fugger businesses were established in the major cities across Europe. A contemporary wrote of Jacob that “his name is known in every kingdom and every region, even among the heathens. Emperors, kings, princes, and lords sent emissaries to him; the pope hailed him and embraced him as his own dear son; the cardinals stood up when he appeared” (Merriman 3). In effect Jacob Fugger became the financier of Europe. He was known simply as Jacob “the Rich.” The Habsburg rulers of Austria were particularly dependent upon Fugger loans. Jacob made loans to Emperor Maximilian and later provided the credit with which the young Charles V bribed the German Electors to accept him as Holy Roman Emperor. Portuguese voyages to India were financed in part with Fugger loans as were later Spanish settlements in Peru. The Habsburgs, however, proved to be poor debtors. Overextended with the financial demands of wars with France and the Ottoman Empire and the religious civil war in Germany, the Habsburgs were unable to repay their loans. Gradually, in the decades following Jacob’s death, the Fugger financial empire withered away. The Fugger name, however, remains memorable and timeless testimony to the rewards and risks of entrepreneurial enterprise.

As we have seen above, textile manufacture became a “nation-wide” capitalist commercial activity. There would develop other capitalistic industries that did not fit the town-guild system of medieval production. Mining, printing, and publishing all required large outlays of money (investment) before any income could be realized. The production of books required a printing press, moveable type fonts, and massive amounts of paper – all relatively expensive for an individual craftsman. But through loans or by pooling finances with interested investors, printers would have access to an international market with a seemingly insatiable demand for reading material. We have seen how the Aldine Press met that need through its production of inexpensive volumes of classical literature. Castiglione’s Book of the Courtier became an international bestseller going through 100 editions between 1528 and 1600. The changing nature of kingship from feudal to national monarchies also stimulated capitalism. Monarchs sought to increase their political power by increasing their military power. Military needs required production of armaments (cannons, muskets), uniforms, barracks, and fortifications. European expansion abroad with commercial interests in Asia and colonial development in the Americas likewise transformed shipbuilding into a major nation-wide industry. Shipbuilding, in turn, stimulated the building of shipyards and such industries as sail and rope making, carpentry, paint, iron casting, and “naval stores” (lumber, pitch, tar, hemp, resins).

The expansion of manufacturing and commercial activity required a ready source of capital. Banking provided that source by extending credit. Banks initially were largely enterprises of wealthy families such as the Medicis or the Fuggers but would later develop as joint stock companies, wherein groups of investors would pool surplus capital for investment purposes. Banks would encourage depositors to put a portion of their earnings in the bank for safe-keeping. Bankers who loaned money expected it to be returned with interest. Interest is the amount of money charged by a creditor (lender) to the debtor (borrower) in order to secure the loan. In short, interest is the money paid to purchase a loan. It is usually a percentage of the principal (the sum being borrowed). It was through interest that banks made the money necessary to meet their operating expenses and still make a profit. Depositors, as bank customers, might themselves receive a share of the bank’s profits through interest payments on their accounts. The bank would use the money deposited to make loans. Banking, as did other capitalist enterprises, involved risk. A bank that overextended credit could suffer serious losses or even collapse should debtors default on loans and not be able to pay them back.

The availability of credit was not without controversy. The Church traditionally condemned the charging of interest as the sin of usury. This prohibition had been among those issues that caused northern European businessmen to become attracted to Protestantism, especially Calvinism. As banking continued to develop and interest rates began to fall, theologians became less adamant in their condemnation and began to distinguish between usury and a “legitimate return” (Palmer et al., 110). By 1600 banking and credit were spiritually acceptable business practices.

In the 17^th century Amsterdam became the center of European international finance. The Bank of Amsterdam, known for its low interest rates and the security of its vaults, attracted depositors from all over Europe. Its depositors could withdraw their funds at will. It even issued its own gold coins which were recognized as an international currency, much like the Euro today.

The overall result of the Commercial Revolution was commercial capitalism, the commercialization of production. The merchant became “the great man of business.” Producers of goods (the artisans, craftsmen, cottage workers) often worked with materials and capital provided by the merchant. “The entrepreneur who knew where an article could be sold prevailed over the person who simply knew how to produce it” (Palmer et al., 110). Commercial capitalism would remain the dominant form of economic activity until the Industrial Revolution of the early 1800s. The development of nation-wide commercial activity would provide the opportunity for governments and states to increase their real wealth and, hence, their power. They would do this through the exercise of policies collectively labeled mercantilism, and that is the subject of a later reading (Section 4.6).

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The image is from the Wikipedia source for Jacob Fugger.

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Sources for the Commercial Revolution

Gilbert, William. Renaissance and Reformation. Lawrence, KS: Carrie Books, 1998.

Knapton, Ernest. Europe 1450 – 1815. New York: Scribners, 1958.

Merriman, John. Modern Europe. New York: Norton, 1996.

Palmer, Robert R. et al. A History of the Modern World. Boston: McGraw Hill, 2002.