This was supposed to be an episode where we talk about the challenges the Hanse was facing after the victory over the Danes and the Peace of Stralsund. But that is not to be. Listeners Mehmet and Nina pointed out a few gaps in what I had been talking about last week and now these need to be filled.

It is all good talking about the trading network and the flow of goods across the Baltic and northern Germany. But what about the opposing flow, the flow of money? How do the Merchants get paid? How can they pay for all the goods they, or their agents, are buying way down in Flanders and England? How do they cope with the sometimes erratic monetary policies of late medieval rulers?

After all, it is money that makes the world go round!

he music for the show is Flute Sonata in E-flat major, H.545 by Carl Phillip Emmanuel Bach (or some claim it as BWV 1031 Johann Sebastian Bach) performed and arranged by Michel Rondeau under Common Creative Licence 3.0.

As always:

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This episode relied heavily on:

Jahnke, Carsten: Die Hanse | Reclam Verlag

Jahnke, Carsten: Netzwerke in Handel und Kommunikation an

der Wende vom 15. zum 16. Jahrhundert am Beispiel zweier Revaler Kaufleute. Netzwerke

(hansischergeschichtsverein.de)

Stuart Jenks: War die Hanse kreditfeindlich? on JSTOR

Historical documents of Hanseatic League added to UNESCO archival heritage list | Tallinn

Hello and welcome to the Hanseatic League, a podcast from the History of the Germans: Episode 12 - Money, Money, Money

This was supposed to be an episode where we talk about the challenges the Hanse was facing after the victory over the Danes and the Peace of Stralsund. But that is not to be. Listeners Mehmet and Nina pointed out a few gaps in what I had been talking about last week and now these need to be filled.

It is all good talking about the trading network and the flow of goods across the Baltic and northern Germany. But what about the opposing flow, the flow of money? How do the Merchants get paid? How can they pay for all the goods they, or their agents, are buying way down in Flanders and England? How do they cope with the sometimes erratic monetary policies of late medieval rulers?

After all, it is money that makes the world go round!

But before we start, let me thank all of you Patrons and one-time supporters out there. I really, really appreciate that supporting a show you can listen to for free is an act of immense generosity. To say it with the author Roman Payne: “Of all public figures and benefactors of mankind, no one is loved by history more than the literary patron. Napoleon was just a general of forgotten battles compared with the queen who paid for Shakespeare's meals and beer in the tavern.” You see, there is a chance to outdo Napoleon for a mere £2 a month, less than a chocolate croissant. All you have to do is go patreon.com/historyofthegermans or historyofthegermans.com/support. And thanks so much to Mary Teresa H., Raphael F., David C. M. and Michael S. who have already signed up.

Last week we talked about how the Hanse worked, or more precisely how current historians believed the Hanse worked. Because the interactions between the merchants and cities are so multifaceted that for the last 200 years each generation of writers picked elements of the story and wove their own narrative, curiously matching contemporaneous political or economic developments.

So, for now the prevailing story is that the Hanse was a complex network that allowed both information and trust to be exchanged so that merchant could send bulky goods to exactly the right place at exactly the right time over vast distances.

Each trader would have a number of associates in each of the main ports. And these associates would send not only the merchandise ordered but also regular reports about the goings on in their own location, as well as what they heard from elsewhere. These letters would contain things like: prices for squirrel pelts are up because winter has come early, the abbot of the local monastery has decided to build a new church and needs wood and other building materials, old Hinrich Warendorp has died and his company is being dissolved, people are gossiping that Jan de Waal is in financial trouble…etc., etc.,

This information is crucial because the goods the Hansards traded in were usually bulky and meant for consumption. Once the ship full of grain had reached Bruges, the grain would have to be sold in Bruges, because shipping it elsewhere was very costly. Knowledge of the likely prices this grain would fetch at Bruges made the difference between a handsome profit and a crippling loss.

Having multiple associates in each city also kept one’s business partner honest. The business community, even in a place like Lubeck was small enough that many people would know if a merchant was taking advantage of one of his partners abroad. Information about that would quickly find its way back to the injured party who could take corrective action.

A tight network of traders who shared information, trust and a common language sounds very neat and efficient, leaving only one question, a question some of you have asked and I have clearly overlooked last week. What about the money?

Oh, such a grubby word. No honourable Hanseatic merchant would talk about money. Or as my grandfather used to say, money is no object since it is non-existant.

And he wasn’t so far off the truth. 14th century moneybags had no money. At least no ready cash.

Moreover, the Hanseatic diet banned merchants from borrowing on several occasions, namely in 1401, 1411, 1415, 1417, 1418, 1423, 1434 and 1447.

Does that mean the Hanse was some sort of commercial paradise of honest brokers who traded on fair terms and shunned excessive leverage, never touching the filthy lucre?

Obviously not. They liked a bag of cash as much as the next man. They just did not think that Uncle Scrooge’s Money Bin was the best way to manage wealth. Their wealth was in constant circulation.

One of the reasons the merchants no longer travelled around with their goods but had become fixed in one location, was that it allowed for a much more efficient investment of cash. Goods they had sent to one place were sold there and turned into other wares that would then travel to the next place, where again, they would be sold and replaced with something else.

Take our friend Bernd Pal, the merchant from Tallin we met last week. He had partners in Lübeck, Narva, Gdansk and Antwerp, but he himself mainly stayed in Tallin. He would ask one of his associates to procure furs from Novgorod via Narva. Those he had shipped to Lübeck where another associate would sell them on his behalf. The proceeds of that transaction would then be used to buy English cloth as per Bernd Pal’s instruction and send back to him in Tallin. Meanwhile he would do the same for his associates and partners who wanted to buy or sell goods in Tallin.

As a consequence, Bernd Pal’s warehouse was full of stuff belonging to his trading colleagues, whilst the goods he owned were in someone else’s cellar. The same goes for the money. The money in Bernd’s strongbox were mainly the proceeds of the sales he had made on behalf of his business partners, whilst again, money he owned was somewhere else in the network. A full reconciliation and payout only happened when Bernd Pal died, and his inheritance was settled.

As long as these transactions operate on a bilateral basis, there is not much need for financial instruments. But the trade had grown a lot more sophisticated than that. Let’s say Bernd Pal has an associate in Lubeck he wants to sell his furs but does not trust to get him a good deal on the English cloth. In that case the money raised by selling the furs needs to go to the broker who will procure the cloth. The way to do that was a bill of exchange.

A Bill of Exchange works is as follows. Bernd Pal wrote an instruction to his fur dealer to pay the cloth dealer an amount of 100 Lübeck Mark at Michaelmas, which is September 29th. This document will be sent to the cloth dealer who would then go to the fur dealer and ask him whether he would honour this instruction. If the fur dealer accepts this Bill of Exchange he becomes the Payor, meaning that at Michaelmas he has to pay the cloth dealer 100 Lübeck mark, no ifs or buts. Now the cloth merchant has a claim against the fur trader who lives in his town and who he could take to court if he fails to pay on time. There is a shortened court procedure for bills of exchange, meaning that he could send the bailiffs round in no time. And if the fur merchant is bankrupt, he could still claim the money from Bernd Pal.

From the cloth merchant’s perspective this Bill of Exchange is almost as good as cash, which means he is happy to find Bernd Pal some English cloth and send it across to Tallin.

Bills of exchange are very common in the Hanse world, as it is in many other trading systems. What the Hanse merchants also use are bearer bonds, which are less common elsewhere.

A bearer bond works as follows. Let’s take again our friend Bernd Pal in Tallin. Assume he wants to buy English cloth for 200 Lübeck mark, but the fur he is sending is worth only 100 marks. He also does not have 100 marks in ready cash to send along with the furs to make up the difference. So, what he can do is issue a document that says he would pay anyone who presents this document back to him the sum of 100 mark. This he sends to the cloth merchant, together with the Bill of Exchange.

The cloth merchant is a long-standing associate of Bernd Pal’s so he knows that Bernd is good for a 100 marks. However, Mr. cloth merchant is unlikely to go to Tallin any time soon to collect the 100 marks. That issue is overcome by the fact that Bernd Pal promised to pay to whoever shows up with this bearer bond. So, cloth merchant can take the bearer bond and swap it with someone else who needs to pay 100 marks in Tallin. In return he receives either cash or another bearer bond or Bill of exchange, for instance in London where cloth merchant gets his cloth from.

Normally bearer bonds do not work very well between individual merchants engaged in long distance trading for the simple reason that they normally do not know each other well and more importantly have no current information about their creditworthiness. In the Hanse with its tight network of information exchange and social control, bearer bonds can work between individual merchants.

Bills of exchange and bearer bonds are not only means to facilitate payments, but they also have a short-term credit element. Bernd Pal knows that it will be several weeks before the bearer bond he issued to pay for the cloth will make it back to Tallin. The 100 marks he will need to pay out once the bond returns in say 6 weeks can be used to finance some short-term investment. In practice this makes the bearer bond a short-term loan. So is a Bill of Exchange. These instruments cover a big art of the liquidity needs of Hanse merchants.

But there are financing needs beyond covering liquidity. For instance, our other Tallin trader, the ambitious Hans Selhorst needed to borrow money to buy himself a large and representative house in the centre of town to convey his new status as a member of the Great Guild. The funds for that he seems to have borrowed from fellow merchants.

We find that some of the large merchants ran a financials business alongside their wholesale franchise. What they mostly did was extending credit to their suppliers of wares. The burghers of Tallin would for instance extend credit to owners of the large Estonian estates, who were also their suppliers of grain and other agricultural produce. They would even lend large sums to bishops and the Teutonic Knights themselves. The reason for these loans was mainly to tie the suppliers to the traders. In Bergen this was an integral part of the business model as the Hansards linked their lending to the exclusive right to purchase the fishermen’s catch at a predetermined price.

Another major finance activity was money exchange. Currencies across the Baltic differed considerably. The silver mark of Lübeck was a key reference currency but most of the large cities, like Riga and Gdansk had their own currencies. The Scandinavian rulers as well as the German princes were minting coins and tried to enforce their use in the cities belonging to their territories. Burgundy and England too had important currencies, which meant that traders were constantly obliged to use foreign exchnage. To avoid having to ship vast amounts of gold and silver in various denominations around the place, a lot of this was done through Bills of Exchange. Say Bernd Pal in Tallin would issue Bill of Exchange, drawn on himself in Riga Mark of silver. That could be exchanged into a Bill of exchange drawn on a Lübeck merchant in Mark of Lübeck at an agreed exchange rate. The exchange rate was also often use to hide the interest on the loan element of the instruments.

Again, the people who would do that were Hanseatic merchants, rather than banks. Once a merchant has risen through the ranks and joined the city council, he will have to spend a lot of time on political issues, sometimes even go on long missions abroad. Unless he has an excellent setup with great apprentices or a competent successor, it will be difficult for him to keep all the different balls in the air, making sure goods arrive on time, payments are made when due etc., That makes finance and real estate more attractive. Lending money or renting out houses requires less oversight and leaves room for political passions, which is why most creditors tend to be the most senior and most powerful people in town.

Bottom line is that there was a lot of banking activity in the Hanse, just that it wasn’t performed by banks. In the same way that the network system precluded the emergence of large trading firms, it also prevented the creation of large banks.

In most markets banks can offer loans on commercial terms superior to individuals. That is down to three reasons. First, they make a spread on the difference in the interest rate they pay on deposits and the interest they charge on loans. The second element is diversification. Banks have large portfolios of loans so that if one borrower fails, the bank can sustain the loss. And third, at least in principle Banks have superior information and sophisticated tools to assess the probability and severity of default.

When the Hanse was at its height, none of these advantages cut through. Deposits were quite rare in a system where merchants kept running their business literally until they dropped dead. They never cashed out. Diversification too was of limited benefit given that the market was comparatively small and major events, such as wars or climate effects led to correlation between defaults. And finally, the network was a much more efficient information and risk mitigation model than a medieval banking house.

Only in the end markets of the Hanse, in London and Bruges did a banking model have a major advantage over the individual merchants, and that is exactly where you find the great banking houses operating. The victim of the privateer Paul Beneke was a banker, Tommaso Portinari, main representative of the Medici bank in Bruges. These banks would offer loans secured by bonds or Bills of exchange. For instance, it allowed a German merchant to use a Bill of Exchange drawn on another Hansard back in Hamburg to purchase goods from a Catalan. The Catalan would not accept the Bill of Exchange on a guy he had never seen or heard of, but the bank would.

We know from English records that the Hanse merchants were some of the most prolific users of lending services in 15th century London. One example of such a heavy user of banking services was Hildebrand Veckinghusen.

All the way into the 20th century historians had dismissed Veckinghusen as the exception that proves the rule. Hansards, so the story goes, were sober, calculating traders who refrained from speculation and excessive risks. In particular Hansards allegedly did not like credit, in fact they had it banned.

What came out was an utterly fascinating but extremely geeky story. So, if you are not particularly interested in the intersection of macros-economics, finance and politics in the 15th century, fast forward, wild guess 4 minutes and we will talk about more accessible topics.

At that time Bruges, like the rest of Flanders was part of the duchy of Burgundy. The duke of Burgundy was Philipp the Bold a man much engaged in war. As such he was always short of the gold he needed to pay the troops. That seems surprising since he was the ruler of the most active commercial and financial markets in Northern Europe, Bruges, Ghent and Antwerp and should hence be immensely rich.

Being the overlord is great, but the problem was how to extract the money from the rich burghers of these cities. He could have increased taxes again, but that had been done already. Plus, it tended to affect the poor more than the rich and these wretches had a tendency to revolt.

If not by tolls and taxes, another way territorial lords funded themselves during this period was by manipulating the currency. Territorial lords, like a state today had the right to determine what was legal tender in their lands. Specifically, they could declare that new coins are being issued and that everyone had to come and exchange their old coins for the new ones. The way the lords made money from that was by handing back less gold or silver than they had received in the exchange.

The victims of this cash extraction could only avoid a loss by two means. Either they melt their coins down and send them abroad. Or they could simply hoard them and wait for better days.

To prevent the former, the lord would issue a ban on all exports of gold, silver or coin upon severe punishment. Whether that works depends a lot on their ability to enforce the ban. And quite frankly a high medieval prince did not have the means to check every transport of grain, cloth or wool for some gold ingots.

A territorial lord who had gone through a couple of rounds of these kinds of devaluation finds himself confronted with a simple question. Is the reason that so few coins are presented at the mint down to either, that there is no more gold left in the country, or is it down to people hoarding precious metal.

The citizens of Bruges were as unwilling to walk around with the equivalent of hundreds of thousands of pounds then as we would be today. A merchant coming to Bruges would set up an account with a Bruges banker, often the host he was staying with. This banker in turn had accounts with most other bankers in Bruges, so that any transaction could be settled account to account. Alternatively, the parties could use bills of exchange, bearer bonds or banker’s drafts. If the merchant was creditworthy, he may also be granted an overdraft on the account or could borrow funds to pay for the merchandise.

That way nobody ever saw any gold or silver coins.

But the duke was convinced they existed, based on the irrefutable evidence that these moneybags seemed to be literally coining it. So, to lure out these elusive florins, livres, pounds and marks, the duke made the city of Bruges demand that all transactions have to be done in cash.

So, instead of handing over a Bill of exchange in lieu of payment, the buyer would have to cash his paper and bring the coins to the seller. Or if the buyer was buying in credit, he needed to get the banker to give him the funds in coin and then hand them to the seller. At that point it was clear who had what coins at home and the duke’s men could come and demand them to be swapped into the inferior specie.

Somehow the grand plan backfired, and badly. Because the duke, great warrior that he was, was no economist, let alone an expert in how money is created. I guess nor are you, so let me take you through a little game.

Imagine there was only one bank in the world with a capital of $100,000 and that is all the money that exists. If I were the luckiest man in the world and was allowed to borrow these $100,000 from this bank, I would receive $100,000 in cash from the bank. The bank now books a claim of $100,000 against me on their balance sheet. I take the $100,000 dollars and buy a house. The person I buy the house from receives the $100,000 in cash and puts it into his bank account with the same bank. The bank now has the $100,000 in cash that they can lend that out again. If you are the second luckiest person in the world and allowed take this $100,000 loan and buy a house, the same thing happens. The Bank books another $100,000 loan as an asset on its books. The seller of the house puts the coins back in the bank, so that there are now loans and deposits of $200,000 in the world, whilst the total number of coins is still only $100,000.

I think we can forgive our friend the duke of Burgundy for not getting it. How could he have known that there was a whole wall of totally legitimate money without any coins? When he demanded settlement in cash for every credit transaction, Bill of exchange etc., the financial system in medieval Bruges went into meltdown. There was already so much more paper money than cash in circulation that there was no way this could be covered. Demand for coins went stratospheric and the nominal price of goods crashed. To get an idea what happens when you do that, google Plano Collor, a more modern equivalent of a similar policy in Brazil in the 1990s.

So, this is the background to the Hanse ban on borrowing. There is financial chaos in Bruges. Coins are hard to come by, which creates hyperdeflation. Merchants who bring in goods to Bruges will get paid a lot less for their goods than they had hoped for. At the Kontor in Bruges it is panic stations.

Remember how the bill of exchange works. Our friend Bernd Pal is sending beeswax to his partner in Bruges for sale as well as a bearer bond for him to cash so that the company can buy some cloth. What he does not send is coins, silver or gold.

His partner in Bruges now has a problem. He has to turn the Beeswax and the bearer bond into local currency and not just into money as an accounting measure, but into actual coins. Even if he manages to do that, the exchange rate is likely absolutely terrible. He then goes and takes the coins to buy the cloth. Cloth prices too have fallen thanks to the deflation, but that is unlikely to be enough to make up for what has been lost on the exchange rate.

That causes a heavy loss to Bernd Pal for which he will blame his partner. Now imagine if Bernd Pal had issued his Bill of exchange in local Bruges currency, in Pound Grote. At that point the associate in Bruges is really in the dumps. Either he accepts the Bill of exchange and pays out the Pounds Grote which means he takes the loss on the exchange rate, or he refuses the Bill of exchange, at which point his own and Bernd Pal’s credit is utterly destroyed.

The merchants at the Hanse Kontor in Bruges realise that something needs to be done urgently. They need to stop this flow of Bills or exchange and other credit instruments coming in from Cologne, Danzig, Riga or Lübeck, at least until this madness is over. The Kontor writes to the Hanseatic diet in Lubeck and asks for them to ban the use of credit in Flanders. Initially the participants in the diet did not quite understand why this was such a big issue. But in the second round they realised that they may lose either the Kontor in Bruges or the good credit of the Hanse merchants in Flanders. So, they reluctantly issued an order to block the issuance of credit. Once the madness is over, the ban is lifted again, and things return to normal.

The duke of Burgundy tried the same stunt again 2 or three times and the Hanseatic diet responded again with a ban on the use of credit. These bans were again lifted once the issue was over.

And that means the Hanse had no problem or objection to credit or cashless payments at all. They blocked its use in circumstances where princely shenanigans caused serious harm to some of the merchants.

So, banking and the use of financial instruments was an integral part of the Hanseatic trade. There was nothing unusual about the way they operated.

However, there was one significant difference between Hansards and their Italian, English, Flemish and Spanish counterparts. They did not use double bookkeeping. The trading records we have from this period suggest that accounting was a complete mess. A Hansard merchant literally had no idea whether his assets and liabilities were balanced, nor did he have a reliable cash forecast. It often took years to work through the collection of letters and order books to reconcile the accounts of a company once one of the partners had left.

Not knowing how much equity a business has is not something that one would want to disclose to the bank when looking for a loan. That may be another reason that there were no banks and that Hanse firms never grew to the size of a Fugger or Ravensburger. They simply could not handle it.

I actually struggle to imagine how they even managed what they had. As we have seen with Bernd Pal, even relatively small merchants would be involved in 3 or 4 different companies whose goods and finances he had to keep separate from his own. Some of his Bills or exchange or bearer bonds were issued in his own name, some in the name of the company, all with different due dates. Cash had to be kept separate and tracked. It really is mindboggling.

And finally, a word about all these currencies. Having all these different coins and frankly mad monetary policy must have been a major problem. A large part of banking in the Middle Ages was foreign exchange. Either direct exchange of foreign coins into local currency or by issuing some sort of traveller cheques which allowed a crusader or merchant to draw funds in lands far away. In both cases the foreign exchange banker would make a handsome profit, usually about 5%.

This made trade more expensive than strictly necessary which is why the Hanse tried to resolve the problem. Many cities had acquired the right to coinage during the 12th and 13th century. The cities did not try to turn their currency into money-making schemes the way the dukes of Burgundy and pretty much all princes were doing. They wanted their currency to remain stable. Cities would form currency clubs that attempted to regulate the quality of the coinage. The most important one was the Münzverein of the Wendish cities. This was formed immediately after the peace of Stralsund and included Lubeck, Hamburg, Wismar and Luneburg as well as a number of associated members. They committed to rules about the minimum silver content in the mark, they had ordinances about how the mint and its personnel, and they would procure the precious metal together from Bohemia. This did help a bit, but even within this club discipline was sometimes lax and it took until the 16th century before they issued their first joint coin, a large silver 1 mark containing 18g of sterling silver.

Having a stable currency would have been a huge benefit to the Hanseatic League and Northern and Eastern Europe in general. But the currency clubs operated outside the context of Hanseatic diets, which did slow down financial integration across the association so that there never was a common currency across the region.

Which is where we will be going next week. We are now in the period where the Hanse begins to notice the unintended consequences of its success in the war with Denmark. Taking control of the herring market in Scania and banning the Dutch and the English from access sets off a sequence of events that turns the great victory into a smouldering calamity. I hope you will join us again next week.

Before I go just a big thank you again to all my Patrons who kindly keep this show on the road. I really, really appreciate your generosity. And if you want to join, there is still a chance to grab one of the unlimited patron subscriptions at patreon.com/historyofthegermans or historyofthegermans.com/support.

And finally, bibliography. This episode relied heavily on:

Jahnke, Carsten: Die Hanse | Reclam Verlag

Jahnke, Carsten: Netzwerke in Handel und Kommunikation an der Wende vom 15. zum 16. Jahrhundert am Beispiel zweier Revaler Kaufleute. Netzwerke (hansischergeschichtsverein.de)

Stuart Jenks: War die Hanse kreditfeindlich? on JSTOR

Historical documents of Hanseatic League added to UNESCO archival heritage list | Tallinn