Title: Cities of Commerce: The Institutional Foundations of International Trade in the Low Countries, 1250-1650
Author: Oscar Gelderblom
Scope: 3 stars
Readability: 4 stars
My personal rating: 5 stars
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Topic of Book
Gelderblom explores the rise of commercial cities of Bruges, Antwerp and Amsterdam and show how they created institutions that promoted trade.
- Medieval and Early Modern Europe had many rules, customs and privileges that constrained trade. Networks of individuals merchants were not strong enough to overcome these constraints. States had a strong incentive to tax or expropriate. The true innovators were the cities.
- The dominant commercial city in Europe changed over time:
- Bruges (in modern-day Belgium) from 1300 to 1480s.
- Antwerp from 1480s to 1580s
- Amsterdam from 1580s to the 18th Century
- The Commercial cities of Medieval and Early Modern Europe were in constant competition with each other to encourage foreign merchants to trade within their cities.
- Any city that did not promote trade or overly favored local merchants put themselves in a strong competitive disadvantage with other cities.
- Merchants were highly mobile, so they could easily relocate to other cities that offered a better trade environment.
- Cities were motivated to adapt institutional arrangements because they expected to gain from the local concentration of regional and international flows of goods, money, and information.
- As one city innovated institutional arrangements that worked better, the other cities had a strong incentive to copy them.
- The decentralized nature of Europe, which at first was a disadvantage, enabled local experimentation, that eventually led to a superior institutional solutions for promoting trade.
Important Quotes from Book
Amsterdam’s rise to commercial primacy was a remarkable achievement. Within fifteen years the city managed to create well-functioning markets for the widest possible variety of goods, financial services, and commercial information. This, in turn, enabled local and foreign merchants to build up large, diversified businesses with Amsterdam as the central node in their international network of trading agents. In the meantime, however, the Dutch Republic continued to fight Spain, exposing merchants on virtually every land and sea route to violence. In addition to this violence, newcomers in Amsterdam were confronted with agency problems that issued from the differences between their own contracting practices and those of other foreigners and local merchants. Amsterdam’s response to these challenges differed markedly from the responses of many of its urban competitors. Instead of granting safe-conducts, consular jurisdictions, or other special rights to separate groups, the city created inclusive institutional arrangements to protect all merchants, regardless of their origin, wealth, religion, or economic specialization against violence and opportunism.
The creation of open access or generalized institutions made it easier for merchants to deal with the conflicts that issued from Europe’s political and legal fragmentation, but the origins of these more inclusive commercial regimes are subject to debate.1 Douglass North, John Wallis, and Barry Weingast, Daron Acemoglu and James Robinson, and others emphasize the formation of stronger states with the military means to protect trade and the legal powers to adjudicate conflicts between traders. One problem with this explanation is that the strongest states in late medieval and early modern Europe were also the most belligerent, witness the military operations of Genoa and Venice in the eastern Mediterranean or the Atlantic power struggle among the Dutch Republic, England, and France.3 Moreover, the importance of strong states is difficult to square with the early expansion of European trade. When European merchants first started trading across longer distances in the eleventh and twelfth centuries, sovereign rulers wielded very little if any power because their territories were small and their fiscal and military resources limited.
To explain the growth of trade in the absence of strong states, Avner Greif has pointed to the development of private order solutions for the problems of violence and opportunism. Peer pressure and the prospect of repeat transactions helped merchants to keep distant agents honest, while the formation of guilds allowed them to organize boycotts and keep rulers from preying on their property.
But there also are problems with this explanation. Notably Sheilagh Ogilvie has argued that group formation could lead to regulatory capture and rent seeking.
The aim of this book is to develop an alternative explanation for institutional change in European commerce that is not predicated upon the existence of strong territorial states or the ability of merchants to create private order solutions. Instead, I argue that the very problem of Europe’s political and legal fragmentation also produced its solution, in the form of competition between urban governments that tried to attract trade through the continuous adaptation of their legal, commercial, and financial institutions.
The motivation of commercial cities to create inclusive institutional arrangements, I argue in this book, issued not from the political franchise of their merchants but from the economic rivalry between these cities. Competition has long been recognized as a key feature of European history with a deep impact on the formation of states, technological change, and economic growth.14 Yet the effect of urban competition on the organization of international trade has remained largely unexplored.15 Premodern Europe was characterized by the existence of a large number of cities with the potential to become a major international market.16 Commercial leadership periodically shifted from one center to another. Achieving a leading position required strong commercial ties with other cities, which in turn stimulated a welcoming attitude toward foreign traders and targeted efforts to adapt local institutions to their business needs. Urban competition thus created a constant impetus to adapt institutions to the needs of the merchant community at large, with the arrival of new merchants further adding to the menu of institutional choices.
To demonstrate how urban competition affected the organization of international trade at its cutting edge, this book analyzes the consecutive rise of Bruges, Antwerp, and Amsterdam to commercial primacy between 1250 and 1650.
Why was it so much easier for cities than for sovereigns to develop institutions to support international trade?
Only cities commanded the financial and legal resources to provide the necessary public goods. In Europe before the Industrial Revolution most taxes were local taxes, and for cities it was relatively easy to fund port facilities, public vending locations, and the local court system from current revenue, notably because trade added considerably to their fiscal resources… Cities were also the most likely providers of legal support because almost everywhere in Europe the law was local, and this gave urban magistrates considerable leeway in dealing with the Continent’s legal fragmentation.
This book argues that urban governments were motivated to adapt institutional arrangements because they expected to gain from the local concentration of regional and international flows of goods, money, and information. There were no predetermined winners of this competition because many cities in Europe had commercial potential. Local supply and demand for goods and services obviously differed between them, but the number of potential gateways within close proximity of each other was such that merchants always had a choice both for the location of their main seat and for the establishment of subsidiary branches.
But the essence of international commerce was the interdependence of a large number of more or less central markets, who could still be very competitive despite a smaller range of goods and services, and a more limited access to other markets. Therefore the efforts of individual cities were directed most of all to maximizing their connectivity with other markets.
The potential benefits to individual cities were large. Not only did the growth of trade lead to the creation of a permanent commercial and legal infrastructure, but as foreigners immigrated and markets became thicker new forms of exchange emerged, for instance in debt finance, insurance, and stock trading. Increased imports and exports also induced the growth of local production and consumption, allowing cities to raise more taxes without damaging the economy. Consequently, commercial expansion strengthened the cities’ bargaining position vis-à- vis that of the central government.45 Sovereigns relied on commercial cities for taxes and loans, which not only increased their commitment to secure property rights and contracting institutions, but also induced their active support for trade, for instance through the issue of safe-conducts or legal privileges to foreign merchants. The growing strength of monarchs after 1500 was at least partially due to their symbiotic relationship with major trading centers, and thus, even in absolutist states where the domestic economy suffered from serious infringements on private property rights, the central government remained very forthcoming toward the commercial cities in their realm.
There were also systemic benefits that accrued to Europe as a whole. While medieval Europe had several commercial subsystems, each with its own institutional arrangements, the growing interaction between regions from the thirteenth century onward gave merchants and magistrates a wider menu of institutional choices on the local market, and it stimulated them to adopt contracting institutions that reduced the costs of trading with other cities. In the long run these institutional adaptations allowed Europe to catch up with the Middle East and China, where contracting institutions in long-distance trade were already highly developed and widely shared at the end of the first millennium. Indeed, after several centuries of urban competition Europe had developed a common set of contracting institutions—and these institutional arrangements were also more varied and sophisticated, a quality that would eventually make them the global standard in the nineteenth century.
Perhaps the most serious constraint on institutional change was the actual deterioration of a city’s economic outlook. When cities were pushed to the periphery of the international urban network they became more susceptible to rent seeking by local elites, who tried to shape local institutions to maintain their share of a shrinking pie. This is very clear in the case of Lübeck and Venice when their commercial primacy faded during the sixteenth century.
So why would rulers compete through institutional arrangements rather than the use of force? Surely the leading cities were powerful enough to hurt commercial rivals through tariffs, embargoes, or outright warfare—and they probably did, considering the high incidence of violence in the history of European trade. However, there were so many competing states in Europe with one or more important markets in their territory that sovereigns were careful not to prey on merchants in these cities. They not just feared the direct loss of fiscal revenue or a higher cost of capital, but also realized they would play into the hands of their political rivals, as foreign merchants in particular were footloose and would not hesitate to remove their business to ports outside their realm.
In brief, the political and legal fragmentation of premodern Europe that harmed trade on many occasions also created competitive pressure on cities to develop institutional arrangements to deal with these problems. Cities were the focal point of institutional change because their governments, regardless of the background of individual members, vied for a more central position in Europe’s urban network. To a large extent this process was self-propelling because the growing connectivity between cities, and the related alignment of institutional arrangements, made it increasingly easy for merchants to relocate at low cost when economic or political circumstances changed adversely. And thus, in a world where merchants moved around easily and cities competed to increase their share in international trade, even in polities in which international traders were entirely without political voice, rulers had strong incentives to improve institutional arrangements.
This book analyzes the business organization of local and foreign merchant communities in Bruges, Antwerp, and Amsterdam. Between 1250 and 1650 these ports succeeded each other as main hubs of long-distance trade in Europe. In 1300 Bruges was one of the first cities on the Continent to establish durable ties with the commercial worlds of the Baltic, the North Sea, and the Mediterranean. As more and more foreign merchants flocked to the Flemish port, it became the principal gateway of Northwestern Europe.53 Antwerp took over Bruges’s leading position in the late fifteenth century, and its appeal to international traders may have been bigger still as the city became the principal outlet for colonial wares imported through Spain and Portugal.54 With the rise of the Amsterdam market after 1585 the commercial center of gravity in Europe definitely shifted to the North Sea area. Merchants in the Dutch Republic established direct trading connections with every known market inside and outside Europe, and by 1650 Amsterdam had become the undisputed center of world trade.
For Bruges and Antwerp, where few local businessmen traded abroad between 1300 and 1500, this competition revolved around the recruitment of foreign merchants. The special privileges they extended to merchants from Germany, England, France, Portugal, Spain, and several Italian cities, and their more general efforts to improve the cities’ commercial and legal infrastructure, were designed to concentrate the sales of manufactures from the Low Countries in one location and to offer merchants from around Europe a platform to trade between each other. In the sixteenth century Amsterdam demonstrated a similar willingness to adapt institutional arrangements, first to increase its share in the Baltic grain trade, and then, after the fall of Antwerp in 1585, to become the principal gateway of Northwestern Europe. Contrary to the earlier efforts of Bruges and Antwerp to attract specific groups of merchants through extensive privileges, Amsterdam chose to treat all merchants, local and foreign, equally.
The organization of international trade in the Low Countries shows how urban competition leads to the creation of inclusive institutions that facilitate exchange and help merchants deal with conflicts. Bruges, Antwerp, and Amsterdam built basically permanent vending locations and regulated brokers’ work to support the local and international exchange of money, goods, and information. The cities continuously amended and adapted local customs to create a broader set of contracting rules that suited their heterogeneous business communities. They also supported a variety of institutions for conflict resolution to enable merchants a measured response to any kind of agency problem. In addition to this constant adaptation of contracting institutions, the three cities established a local monopoly of violence early on, and they were a major force against the centralizing tendencies of the houses of Burgundy and Habsburg, who had to delegate considerable administrative and fiscal authority to the individual cities. In the end Amsterdam’s role as the guardian of commercial interests was perhaps the most pronounced. In the mid-sixteenth century Antwerp resisted the princely protection of its merchant fleet, but after 1580 Amsterdam worked with other cities in Holland and Zeeland to create a permanent Dutch fleet.
The history of Bruges, Antwerp, and Amsterdam forces us to reconsider current theories of institutional change, starting with those of North, Acemoglu, Johnson, and Robinson, and others who consider strong states with limited government a crucial prerequisite for the creation of inclusive, open access institutions.
The present study shows, however, that political constraints on the executive were of secondary importance for institutional change in the commercial cities of the Low Countries. International traders seldom participated in the political process. In Bruges and Antwerp local businessmen and public officeholders controlled the town council, while in Amsterdam the clique of local merchants who dominated the magistrate persistently tried to exclude other traders, local and foreign. Instead, the constraints on the rulers of Bruges, Antwerp, and Amsterdam were economic. They adapted institutional arrangements to the needs of international traders because they faced strong competition from other potential gateways with good overseas and overland connections to each other and to a hinterland with marketable surpluses. To attract as many merchants as possible the municipal governments of the three cities tried to protect merchants to the best of their abilities against violence and opportunism, and these efforts created the kind of inclusive, open access international markets that institutional economists have long recognized as a key to the growth of European trade.
The basis for this transformation lay in a combination of three factors, the first of which was the large number of cities with direct access to tradable surpluses at home and abroad that vied for the presence of foreign traders.
Second, international traders were footloose. They easily moved from one place to another, implying cities with equal economic opportunities had a real incentive to influence the cost-benefit calculus of individual traders to secure their prolonged presence. The opportunity for merchants to relocate was obviously greater in regions with multiple gateways, but what mattered even more was the possibility of choosing between cities with access to the same hinterland. In this respect the ports of the Low Countries offered considerably more freedom to foreign merchants than cities like Lübeck, Venice, or, until the sixteenth century, London, acting as the sole gatekeepers of their own hinterland. The same was true for the ports of the Levant, where foreign merchants were free to move between cities, but each of them restricted access to buyers and suppliers in their hinterland.
Third, the political autonomy of commercial cities in late medieval and early modern Europe gave their municipal government both the financial resources and the legal power to adapt institutional arrangements to changes in the scale and scope of trade.
The institutional adaptiveness of commercial cities hinged—paradoxically— on the freedom of merchants to choose their own rules and the institutional heterogeneity this created. The variation of solutions available to traders in commercial cities increased with the number of merchants from different parts of Europe, notably because rulers accepted the coexistence of alternative arrangements. Urban magistrates did not sanction specific contracting rules of resident traders or newcomers but instead amended local customs both with mercantile usages introduced by foreigners and with new practices that emerged from increased trading on the local market.
The long-term variation in contracting rules eventually spawned a more reduced and coherent set of institutions as merchants responded to changes in the relative costs and benefits of specific arrangements. They adapted their business organization when they recognized the cost advantages of using either a specific combination of institutions or an individual institution that served more than one purpose. The magistrates of Bruges, Antwerp, and Amsterdam, for their part, supported this ongoing selection process through adjustments and amendments of their local customs, including the incorporation of written declarations on mercantile practice by traders and other professionals. At the same time the cities refrained from the codification of a preferred set of contracting institutions, thus giving merchants the largest possible menu of choices. This constant adaptation of contracting institutions may be understood as an evolutionary process in which merchants and cities selected, from a variety of available institutions, those most fit to organize commercial and financial transactions. It is important to note, however, that variation remained the norm, even within the confines of single locations.
The determined efforts of commercial cities to support private contracting between international traders turned what could have been a very serious problem—the legal fragmentation of Europe—into a source of institutional improvement. This development lends support to the optimistic view of scholars who stress the dynamic role of commercial cities in the growth of the European economy before the Industrial Revolution. But the corporate reflex in some cities notwithstanding, institutional change did not stop. The overall trend in early modern Europe was undeniably toward more inclusive, open access institutions. The principal reason for this was that leading markets thrived on the confluence of merchants from more peripheral markets. Cities at the top of the urban hierarchy had a competitive advantage in specialized sectors that thrived on the spatial concentration of supply and demand, for example colonial wares, marine insurance, bullion, and bills of exchange. These offerings made cities like Venice, Bruges, Antwerp, Amsterdam, and London indispensable nodes in the multilateral trading networks of merchants all over Europe, and as foreign merchants continued to settle in the leading ports, their markets grew thicker. This stimulated the further improvement of commercial and financial techniques, like the acceptance of bills of exchange, derivatives trading, or fiat money, and it allowed merchants to diversify their investments at low cost and increase their resistance against shocks. Finally, it is important to note that local rent seeking could never really reverse the adoption of more inclusive institutions. Regulatory capture obviously harmed outsiders in more peripheral cities, but the systemic costs remained small because the business elites of these cities, if they wanted to maintain some presence in international markets, could not afford to steer their own institutional course. Merchants in cities that were trapped in a situation of stable or even declining participation in international trade, even if they managed to exclude foreign or local competitors, still conformed to institutional best practices that emerged in Europe’s commercial heartland. There was a latent benefit to this institutional copying because it allowed for easy catch-up when economic prospects improved. Thus, Venice had no difficulty accommodating large numbers of English and Dutch merchants after 1590, London made a very smooth transition to a more open market in the mid-seventeenth century, and, perhaps most spectacularly, Antwerp, after two centuries of relative isolation, managed to regain a dominant position within decades after the reopening of the river Scheldt in 1795. In other words, institutional best practice, initiated in the Mediterranean world, incorporated in the local customs of Bruges, Antwerp, and Amsterdam, described in Gerard Malynes Lex Mercatoria 1622, and then codified in Colbert’s Code de Commerce in 1673, eventually became a public good shared by merchants from all over Europe and then, in the nineteenth century, was exported to the rest of the world.