CHAPTER XXIII

THE EXTERNAL FACTS IN THE EVOLUTION OF CAPITALISM ¹

Commercialization involves, in the first place, the appearance of paper representing shares in enterprise, and, in the second place, paper representing rights to income, especially in the form of state bonds and mortgage indebtedness. This development has taken piace only in the modern western world. Forerunners are indeed found in an tiquity in the share-commandite companies of the Roman publicani, who divided the gains with the public through such share paper. But this is an isolated phenomenon and without importance for the provision for needs in Roman life; if it had been wanting entirely, the picture presented by the economic life of Rome would not have been changed.

In modern economic life the issue of credit instruments is a means for the rational assembly of capital. Under this head belongs especially the stock company. This represents a culmination of two different lines of development. In the first place, share capital may be brought together for the purpose of anticipating revenues. The political authority wishes to secure command over a definite capital sum or to know upon what income it may reckon; hence it sells or leases its revenues to a stock company. The Bank of St. George in Genoa is the most outstanding example of such financial operations, and along the same line are the income certificates of the German cities and treasury notes (Rentenmeisterbriefe) especially in Flanders. The significance of this system is that in place of the original condition under which unusual state requirements were covered by compulsory law, usually without interest and frequently never repaid, loans come to be floated which appeal to the voluntary economic interests of the participants. The conduct of war by the state becomes a business operation of the possessing classes. War loans bearing a high interest rate were unknown in antiquity; if the subjects were not in a position to supply the necessary means the state must turn to a foreign financier whose advances were secured by a claim against the spoils of war. If the war terminated unfortunately his money was lost. The securing of money for state purposes, and especially for war purposes, by appeal to the universal economic interest, is a creation of the middle ages, especially of the cities.

Another and economically more important form of association is that for the purpose of financing commercial enterprise—although the evolution toward the form of association most familiar today in the industrial field, the stock company, went forward very gradually from this beginning. Two types of such organizations are to be distinguished; first, large enterprises of an inter-regional character which exceeded the resources of a single commercial house, and second, inter-regional colonial undertakings.

For inter-regional enterprises which could not be financed by individual entrepreneurs, finance by groups was typical, especially in the operations of the cities in the 15th and 16th centuries. In part the cities themselves carried on inter-regional trade, but for economic history the other case is more important, in which the city went before the public and invited share participation in the commercial enterprise which it organized. This was done on a considerable scale. When the city appealed to the public, compulsion was exercised on the company thus formed to admit any citizen; hence the amount of share capital was unlimited. Frequently the capital first collected was insufficient and an additional contribution was demanded, where today the liability of the share holder is limited to his share. The city frequently set a maximum limit to the individual contribution so that the entire citizenship might participate. This was often done by arranging the citizens in groups according to the taxes paid or their wealth and reserving a definite fraction of the capital for each class. In contrast with the modern stock company the investment was often rescindable, while the share of the individual was not freely transferable. Hence the whole enterprise represented a stock company only in an embryonic sense. Official supervision was exercised over the conduct of operations.

In this form the so-called “regulated” company was common, especially in the iron trade as in Steier, and it was occasionally used in the cloth trade, as in Iglau. A consequence of the structure of the organizations just described was the absence of fixed capital and, as in the case of the workers’ association, the absence of capital accounting in the modern sense. Share holders included not only merchants, but princes, professors, courtiers, and in general the public in the strict sense, which participated gladly and to great profit. The distribution of the dividends was carried out in a completely irrational way, according to the gross income alone, without reserves of any kind. All that was necessary was the removal of the official control and the modern stock company was at hand.

The great colonization companies formed another preliminary stage in the development of the modern stock company. The most significant of these were the Dutch and English East India companies, which were not stock companies in the modern sense. On account of the jealousy of the citizens of the provinces of the country the Dutch East India Company raised its capital by distributing the shares among them, not permitting all the stock to be bought up by any single city. The government, that is the federation, participated in the administration, especially because it reserved the right to use the ships and cannon of the company for its own needs. Modern capital accounting, was absent as was free transferability of shares, although relatively extensive dealings in the latter soon took place. It was these great successful companies which made the device of share capital generally known and popular; from them it was taken over by all the continental states of Europe. Stock companies created by the state, and granted privileges for the purpose, came to regulate the conditions of participation in business enterprise in general, while the state itself in a supervisory capacity was involved in the most remote details of business activity. Not until the 18th century did the annual balance and inventory become established customs, and it required many terrible bankruptcies to force their acceptance.

Alongside the financing of state needs through stock companies stands direct financing by measures of the state itself. This begins with compulsory loans against a pledge of resources and the issue of certificates of indebtedness against anticipated revenues. The cities of the middle ages secured extraordinary income by bonds, pledging their fixed property and taxing power. These annuities may be regarded as the forerunners of the modern consols, yet only within limitations; for to a large extent the income ran for the life of the purchaser, and they were tied up with other considerations. In addition to these devices the necessity of raising money gave rise to various expedients down to the 17th century. The emperor Leopold I attempted to raise a “cavalier loan,” sending mounted messengers around to the nobility to solicit subscriptions; but in general he received for answer the injunction to turn to those who had the money.

If one desires to understand the financial operations of a German city as late as the close of the middle ages, one must bear in mind that there was at that time no such thing as an orderly budget. The city, like the territorial lord, lived from week to week as is done today in a small household. Expenditures were readjusted momentarily as income fluctuated. The device of tax farming was of assistance in overcoming the difficulty of management without a budget. It gave the administration some security as to the sums which it might expect each year, and assisted it in planning its expenditures. Hence the tax farm operated as an outstanding instrument of financial rationalization, and was called into use by the European states occasionally at first and then permanently. It also made possible the discounting of public revenues for war purposes, and in this connection achieved especial significance. Rational administration of taxation was an accomplishment of the Italian cities in the period after the loss of their freedom. The Italian nobility is the first political power to order its finances in accordance with the principle of mercantile bookkeeping obtaining at the time, although this did not then include double entry. From the Italian cities the system spread abroad and came into German territory through Burgundy, France, and the Hapsburg states. It was especially the tax payers who clamored to have the finances put in order.

A second point of departure for rational forms of administration was the English exchequer system, of which the word “check” is a last survival and reminder. This was a sort of checker board device by means of which the payments due the state were computed, in the absence of the necessary facility in operating with figures. Regularly, however, the finances were not conducted through setting up a budget in which all receipts and disbursements were included, but a special-fund system was used. That is, certain receipts were designated and raised for the purpose of specified expenditures only. The reason for this procedure is found in the conflicts between the princely power and the citizens. The latter mistrusted the princes and thought this the only way to protect themselves against having the taxes squandered for the personal ends of the ruler.

In the 16th and 17th centuries an additional force working for the rationalization of the financial operations of rulers appeared in the monopoly policy of the princes. In part they assumed commercial monopolies themselves and in part they granted monopolistic concessions, involving of course the payment of notable sums to the political authority. An example is the exploitation of the quicksilver mines of Idria, in the Austrian province of Carniola, which were of great importance on account of the process of amalgamating silver. These mines were the subject of protracted bargaining between the two lines of the Hapsburgs and yielded notable revenues to both the German and the Spanish houses. The first example of this policy of monopoly concession was the attempt of the Emperor Frederick II to establish a grain monopoly for Sicily. The policy was most extensively employed in England and was developed in an especially systematic manner by the Stuarts, and there also it first broke down, under the protests of Parliament. Each new industry and establishment of the Stuart period was for this purpose bound up with a royal concession and granted a monopoly. The king secured important revenues from the privileges, which provided him with the resources for his struggle against Parliament. But these industrial monopolies established for fiscal purposes broke down almost without exception after the triumph of Parliament. This in itself proves how incorrect it is to regard, as some writers have done, modern western capitalism as an outgrowth of the monopolistic policies of princes.²