How accounting made financial markets in the Early Modern age

by Nadia Matringe, London School of Economics

In the early modern age, accounting was the site of finance.

From the sixteenth century onwards, the unprecedented growth of international trade and banking gave rise to the great exchange fairs (Lyon, Bisenzone, Castile, Frankfurt, etc.), with international clearing and banking functions. To exploit these new opportunities while limiting risks, a growing number of banks at the fair locations specialised in the commission business, which required a high demand for goods and capital to yield substantial profits.

Both these transformations deeply affected the international payments system. In particular, they gave rise to new uses of accounting as a payment and credit instrument.

The research, to be presented at the Economic History Society’s 2017 annual conference, analyses this transformation and highlights the role of accounting in shaping early modern financial markets. It shows that at that time, accounting tables were not only used as local means of payment through book transfers initiated by oral order: they also became the sole material support for a growing number of international fund transfers and credit operations.

Indeed, as chains of commission increased in length and density, both the exchange and the deposit business changed in form and started to be increasingly operated through the accounting medium.

The classical exchange operations, which usually involved four parties (a drawer, a remitter, a payer and a payee) and the circulation of a bill of exchange between two markets, could now be conducted by two parties through their corresponding accounting systems, on behalf of several clients.

In these transactions, bank A would draw on and remit monies to bank B on behalf of clients who appeared as drawers and remitters by proxy. Payments on both markets took the form of book transfers, and no bill of exchange was issued: banker A simply informed banker B in his usual correspondence to credit and debit the pertinent accounts according to agreed exchange rates.

Such transactions performed multilateral clearance between distant regions of the world, where the bankers’ clients had business.

Two-party exchange transactions reduced to accounting entries also served banking activity at the local level. In this case, at least one side of the exchange transaction (the remittance or the draft) was meant to lend or to borrow money in one of the two markets. The exchange was followed by a rechange in the opposite direction, and at a different rate, and interest was charged according to the differences in exchange rates.

Finally, the taxation of overdrafts on current accounts at the fair location enabled clients to buy bills of exchange on foreign markets without provision, and to postpone payment of those drawn on them. Consequently, deposits in Lyon, Antwerp or Castile could create credit in Florence, Paris, London, etc.

Furthermore, this old fair custom of deferments gave rise in the sixteenth century to autonomous deposit markets whose rate circulated publicly, enabling ‘outsiders’ who otherwise had no business in the fairs, to invest their savings there.

The research thus shows that in the context of the rapid development of international banking centres and the correlated rise of commission trading, accounting made financial markets.

Its function was similar to that of modern algorithms used to match orders and perform financial transactions. Accounting tables were used to make payments, transfer funds, operate clearance and grant interest-bearing loans – all of which could be combined in a single game of book entries in the accounts of corresponding partners.

International trade and banking were supported by a network of interconnected accounting systems. This accounting network appears as a major infrastructure of early modern trade, without which the whole European payment system would have collapsed.