“This richly detailed book offers an important and critical reexamination of the commercial revolution in Northern Europe. Combining key insights from law and institutional economics with a sharp historical narrative, Gelderblom produces a striking new understanding of how formal and informal institutions propelled the European economy forward.”–Jean-Laurent Rosenthal, California Institute of Technology

“Cities of Commerce is a major contribution to the debate about the role of institutional change in facilitating growth and commercial expansion. Few writers before Gelderblom have attempted to discuss the problem of commercial dislocation over such a long period.”–David Ormrod, University of Kent

“Illuminating. This book advances the argument that intercity competition over long-distance trade in premodern Europe took the form of legal changes favorable to commerce. This important argument provides new insight into European history and the institutional foundations of the rise of the West. Gelderblom is a first-rate scholar.”–Avner Greif, Stanford University

“Cities of Commerce is vigorously argued, well documented, and clearly presented. It will be a much read and debated contribution to a very active field of inquiry in economic history.”–Jan deVries, University of California, Berkeley

Oscar Gelderblom is associate professor of economic history at Utrecht University. He is the editor of The Political Economy of the Dutch Republic.

Cities of Commerce

THE INSTITUTIONAL FOUNDATIONS OF INTERNATIONAL TRADE IN THE LOW COUNTRIES, 1250–1650

By Oscar Gelderblom

PRINCETON UNIVERSITY PRESS

Copyright © 2013 Princeton University Press
All rights reserved.
ISBN: 978-0-691-14288-3

Contents

Illustrations……………………………………………………..ixAcknowledgments……………………………………………………xiCHAPTER 1 Introduction…………………………………………….1CHAPTER 2 Commercial Cities………………………………………..19CHAPTER 3 The Organization of Exchange………………………………42CHAPTER 4 Crossing Borders…………………………………………76CHAPTER 5 Conflict Resolution………………………………………102CHAPTER 6 The Protection of Trade…………………………………..141CHAPTER 7 Dealing with Losses………………………………………169CHAPTER 8 Conclusion………………………………………………198Appendix A The Incidence of Violence against Foreign Merchants in the Low
Countries, 1250–1650……………………………………………….211Appendix B The Motivation, Organization, and Outcome of Collective Action
by Merchants of the German Hanse in Bruges, 1250–1500………………….227Abbreviations……………………………………………………..233Bibliography………………………………………………………235Index…………………………………………………………….277

CHAPTER 1

Introduction

When Spanish troops captured Antwerp in August 1585 the city’smerchants faced a difficult choice. They could stay, if they accepted thesovereignty of Philip II, but commercial prospects were bleak since largegroups of Flemish textile workers had already left for France, England,and Holland and Dutch rebels blocked the river Scheldt and the Flemishcoast. An alternative was to move to Protestant London, but here thelocal business elite actively tried to exclude newcomers. The Atlanticports of Rouen and Nantes offered good connections to many countriesin Western Europe, but France was embroiled in civil war, just like theNorthern Netherlands where Zeeland and Holland remained fully exposedto military action. Hamburg and Emden in northern Germanywere safer havens, but their Baltic affairs languished. Eventually Amsterdamattracted most traders from Antwerp. The immigration therestarted with merchants who specialized in the exchange of grain andtextiles with the Baltic region, but soon enough the Dutch port becamethe preferred destination of merchants with a much broader commercialoutlook, including a considerable number of German, Portuguese,English, and Italian merchants.

Amsterdam’s rise to commercial primacy was a remarkable achievement.Within fifteen years the city managed to create well- functioningmarkets for the widest possible variety of goods, financial services, andcommercial information. This, in turn, enabled local and foreign merchantsto build up large, diversified businesses with Amsterdam as the centralnode in their international network of trading agents. In the meantime,however, the Dutch Republic continued to fight Spain, exposingmerchants on virtually every land and sea route to violence. In additionto this violence, newcomers in Amsterdam were confronted with agencyproblems that issued from the differences between their own contractingpractices and those of other foreigners and local merchants. Amsterdam’sresponse to these challenges differed markedly from the responses ofmany of its urban competitors. Instead of granting safe- conducts, consularjurisdictions, or other special rights to separate groups, the city createdinclusive institutional arrangements to protect all merchants, regardlessof their origin, wealth, religion, or economic specialization againstviolence and opportunism.

The creation of open access or generalized institutions made it easierfor merchants to deal with the conflicts that issued from Europe’s politicaland legal fragmentation, but the origins of these more inclusive commercialregimes are subject to debate. Douglass North, John Wallis,and Barry Weingast, Daron Acemoglu and James Robinson, and othersemphasize the formation of stronger states with the military means toprotect trade and the legal powers to adjudicate conflicts between traders.In their view, a state like the Dutch Republic could credibly committo the safety of merchants because effective constraints on its executivepower legitimized both their military and legal interventions and the fiscalefforts to provide this protection. One problem with this explanationis that the strongest states in late medieval and early modern Europewere also the most belligerent, witness the military operations of Genoaand Venice in the eastern Mediterranean or the Atlantic power struggleamong the Dutch Republic, England, and France. Moreover, the importanceof strong states is difficult to square with the early expansion ofEuropean trade. When European merchants first started trading acrosslonger distances in the eleventh and twelfth centuries, sovereign rulerswielded very little if any power because their territories were small andtheir fiscal and military resources limited.

To explain the growth of trade in the absence of strong states, AvnerGreif has pointed to the development of private order solutions for theproblems of violence and opportunism. Peer pressure and the prospectof repeat transactions helped merchants to keep distant agents honest,while the formation of guilds allowed them to organize boycotts andkeep rulers from preying on their property. Private order solutions thuscontributed to the growth of trade in two distinct ways: they reduced oreven preempted the merchants’ reliance on the government to enforcecontracts, and they could stimulate local or central authorities to protectmerchants and provide impartial justice. But there also are problemswith this explanation. Notably Sheilagh Ogilvie has argued that groupformation could lead to regulatory capture and rent seeking. When localmerchant guilds and chartered companies used their social capital andcorporate power to exclude competitors, they could strangle economicgrowth. On the other hand, the historical record shows that local andforeign merchants were willing to forego a corporate status when localrulers stepped in to provide the necessary legal and commercial supportfor their private business operations.

The aim of this book is to develop an alternative explanation for institutionalchange in European commerce that is not predicated upon theexistence of strong territorial states or the ability of merchants to createprivate order solutions. Instead, I argue that the very problem of Europe’spolitical and legal fragmentation also produced its solution, in the formof competition between urban governments that tried to attract tradethrough the continuous adaptation of their legal, commercial, and financialinstitutions. Cities may seem a most unlikely candidate because theirpolitical power was limited and their jurisdiction did not reach far beyondthe city walls, but even though the law was local and internationaltrade—by definition—was not, the cities’ legal autonomy actually madeit easier for municipal governments to adapt institutional arrangementsto the needs of international traders. At the same time, the financial resourcesof commercial cities, both taxes and loans, were so important formost sovereigns that they seldom clamped down on major entrepôts.But even then, why did the magistrates of commercial cities act in theinterest of the merchant community at large instead of favoring specificgroups of traders or excluding others—rent seeking behavior that can beobserved in many industrial towns? One might argue that internationaltraders formed the government of commercial cities. But this was notalways the case, witness Venice or Antwerp, and even when active tradersdid dominate the municipal government, like in Amsterdam or London,they typically belonged to a very small political elite that excluded notjust foreign merchants but also many local traders from power.

The motivation of commercial cities to create inclusive institutional arrangements,I argue in this book, issued not from the political franchise oftheir merchants but from the economic rivalry between these cities. Competitionhas long been recognized as a key feature of European historywith a deep impact on the formation of states, technological change, andeconomic growth. Yet the effect of urban competition on the organizationof international trade has remained largely unexplored. PremodernEurope was characterized by the existence of a large number of citieswith the potential to become a major international market. Commercialleadership periodically shifted from one center to another. Achieving aleading position required strong commercial ties with other cities, whichin turn stimulated a welcoming attitude toward foreign traders and targetedefforts to adapt local institutions to their business needs. Urbancompetition thus created a constant impetus to adapt institutions to theneeds of the merchant community at large, with the arrival of new merchantsfurther adding to the menu of institutional choices.

To demonstrate how urban competition affected the organization ofinternational trade at its cutting edge, this book analyzes the consecutiverise of Bruges, Antwerp, and Amsterdam to commercial primacy between1250 and 1650. In doing so, we will be able to answer several outstandingquestions regarding the organization of international trade before1800. Why did institutional change continue in Europe for many centurieswhile it stagnated in other commercialized areas like the MiddleEast or China? Why was the adaptation of contracting institutions inEurope not confined to areas with strong cities and weak sovereigns, butinstead affected every town with commercial aspirations even in absolutiststates like France or Spain? On the other hand, competition betweencities, or rather changes in their competitive strength, can also explainwhy in some of them, after long periods of openness toward foreign traders,the dynamic process of institutional change ended in regulatory captureby local elites. And finally, urban competition helps to explain whyeven ports at the very top of Europe’s urban hierarchy, in spite of theirvery sophisticated commercial and financial institutions, eventually losttheir competitive advantage, producing Fernand Braudel’s now classicsequence of commercial capitals from Venice to Antwerp, Genoa, Amsterdam,and then London. But before we can answer these questions,we should consider in greater detail the dynamics of institutional change.

State Formation and the Growth of Trade

Modern theories of institutional change take the strength of sovereignrulers as a crucial variable to explain institutional continuity or change.The basic assumption is that sovereign rulers who are strong enoughto protect the property of their subjects may also abuse these powersand harm the interests of their subjects. England is a principal referencepoint in all of these theories that derive from the work of Englishpolitical philosophers like Hobbes, Steuart, and Smith, who were amongthe first to identify the crucial role of sovereigns in the protection ofprivate property. In particular, England’s history before and after theGlorious Revolution (1688–89) has led political scientists and economichistorians to argue that the establishment of constitutional government in1688 was a prerequisite for the creation of more secure property rights,the improvement of contracting institutions, and the subsequent growthof British trade and industry in the eighteenth and nineteenth centuries.

From an English point of view these causal inferences seem reasonableenough because royal interventions in England’s economy had a longpedigree. In the thirteenth century kings already regulated payments andcredit operations, opened their courts to local and foreign merchants, andchartered trading companies for the export of wool and cloth. In the earlymodern period the crown organized and reorganized London’s charteredcompanies, introduced radical protectionist policies, and created a standingnavy with the explicit goal of furthering England’s commercial interests.For many economic historians the Glorious Revolution was afundamental breakthrough, not just in politics and public finance butalso in foreign trade, because it ended the privileged position of a limitednumber of London merchants who until then controlled virtually every sectorof international commerce. According to Acemoglu, Johnson, and Robinson(2005) the political revolution was indeed caused by the emergence ofa new group of merchants in England’s rapidly expanding Atlantic trade.Their growing political power would have forced the English crown tosupport institutional arrangements that benefited the merchant communityat large.

The English case is nevertheless a poor foundation for empirical generalizationsabout the role of central governments in the organization oftrade because the political situation was very different from that in therest of Europe. London was the main gateway for domestic producersand foreign traders, but it was also the country’s political and administrativecenter, as a result of which the crown had very close ties to the localbusiness elite. On the European Continent, whether in Spain, France,Germany, or the Dutch Republic, the major commercial cities were alwaysat a distance from the seat of government. As a result, there wasno Continental equivalent of the chartered companies that controlledEngland’s exports to Europe, and even though several princes opened uptheir central courts to commercial litigation, they could not fulfill theirpromise to adjudicate conflicts between merchants from different legalbackgrounds because proceedings were too slow and the professionallawyers too ignorant about mercantile usage. Consequently, merchantson the Continent had to rely on the market facilities and legal servicesprovided by individual cities to support their trade.

A further drawback of the model proposed by Acemoglu, Johnson,and Robinson is its exclusive focus on Atlantic trade. The political andeconomic demands of London’s colonial merchants did not necessarilyreflect the concerns of English traders who operated within Europe.Whereas the latter wanted the government only to facilitate private trading,the organization of trade in the Atlantic and particularly in Asiarequired a very specific combination of diplomacy, military effort, andforeign trading posts to control distant markets and withstand Europeanrivals. Thus, the active involvement of the English crown in colonialtrade was a sheer necessity, and altogether very similar to that of Veniceand Genoa when they first ventured into the Islamic world in the eleventhcentury or, for that matter, any other colonial power in Europe inthe sixteenth and seventeenth centuries. As trade within Europe did notrequire this kind of intervention, and Continental princes in any caselacked the power to do so, England’s particular institutional trajectory ofthe seventeenth century with the crown as the protagonist of institutionalchange remains a poor guide to the institutional arrangements that supportedthe growth of trade within Europe before 1800.

Private Order Solutions

Now how could merchants prevent violent assaults or the opportunisticbehavior of their agents without the support of sovereign rulers? Themost extreme answer to this question is that foreign traders did not needthe government because they relied on private order solutions instead.The history of European trade provides many examples of merchants organizingtransactions privately. Whether in the Mediterranean, the BalticSea, or the Atlantic world, the commercial operations that emerge fromaccount books and business letters invariably point to the crucial importanceof personal relations in the organization of cross- border trade. Inthe case of the Sephardic Jews or the Christians from Armenia it is veryclear that merchants could build large commercial networks without anysupport of a home government. The international diamond trade of theeighteenth century also suggests that informal agreements sufficed to closebig deals, and in the first early modern stock markets of Amsterdam andLondon traders explicitly renounced government intervention. It is notdifficult to add more examples to show how friendship and kinship, sharedcultural beliefs, and the prospect of repeat transactions helped merchants tokeep agents honest. But would that prove that private order solutions cansustain international trade in a legally and politically fragmented world?

Yes, says Avner Greif, that is exactly what happened in Europe duringthe Commercial Revolution of the eleventh and twelfth centuries, whenmerchants developed several institutional arrangements to trade at arm’slength without recourse to a third party. Jewish merchants trading betweenNorth Africa and Italy in the eleventh century, for instance, formedcoalitions within which they shared information about agents in other locations.Their surviving correspondence suggests that regular interactionallowed the Maghribi traders to detect defaulters and to exclude themfrom future transactions, thus creating a strong incentive for individualmembers to honor their obligations. Many more merchants in medievalEurope traded in guilds, consulados, and hanses—mercantile associationsthat paired a strong sense of community to collective liability for thedebts of individual members and punishment through exclusion. Someof these associations, the German Hanse in particular, were so well organizedthat they could credibly threaten foreign rulers to leave collectivelyin case they preyed on any one of their members. Finally, quite a fewlegal and economic historians have argued for the existence of a medievallex mercatoria, or law merchant—a uniform legal code distinct fromexisting Roman law, canon law, and common law, which would haveemerged spontaneously from regular exchange between merchants fromdifferent local backgrounds.
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