PAYMENTS AND THE DEVELOPMENT OF FINANCE IN PRE-INDUSTRIAL EUROPE
Working Paper, Department of Economics, Dartmouth College, November (2001)
The principal driving force in the development of the financial system of pre-industrial Europe was not lending per se, but payments. Trade among strangers required the development of methods of payment that did not require mutual acquaintance and trust. The two principal financial innovations of pre-industrial Europe—the deposit bank and the bill of exchange—evolved to address this need. Lending initially developed as an adjunct to the payments system and then expanded to fill other functions.
In the medieval economy, most trade took place within communities of people who knew one another well—either local communities or communities of merchants who traded with one another on a regular basis. Within such communities trade was largely conducted on the basis of credit.