Note: In chapter 2 and 3, I have used the original pagination of Innes, and excluded the new pagination of Wray

(II) Early Public Banks

The origins of modern capitalism are also to be found in the mutually advantageous relationships that were forged between these early deposit bankers and their hosts in the Mediterranean city states. The 'memorable alliance' in the seventeenth century, between financiers and state, that Weber gave importance to in explaining the rise of capitalism had quite humble origins in the thirteenth and fourteenth centuries. Money changers purchased permits from the governments of Mediterranean city states and also performed various public functions, in return for which they received protection. By the fourteenth century in Genoa, for example, bankers were converting currencies for the commune, seeking out forged or forbidden coins, and generally supervising the circulation of the coined currency. The governments required the bankers to make their records available for inspection and to produce guarantors for outstanding debts. In return the government backed the bankers' credibility by recognising their book entries as proof of transactions in bank lending and transfer. Most importantly, as we shall see shortly, the city governments became the largest clients of the banks and their debts were to be transformed into money by the bankers' giro network of depositors.

The situation was different in the European dukedoms and kingdoms. Here the emphasis was on bullion, not banking. Sovereigns sought to control both money of account and the issue of coinage by controlling the flow of precious metal. In the main they looked on their merchants and bankers as competitors whose book transactions evaded taxation and reduced their seigniorage profits from minting.

The large-scale financing of the city-states' protection and warfare costs was increasingly undertaken by these banks from the late thirteenth century onwards and banking's fundamental 'liquidity' problem soon appeared. The crash of Genoese Leccacorvo enterprise in 1261, when it was unable to guarantee more than 10 per cent of its debts to depositors, anticipated the later and better known failures in the fifteenth and sixteenth centuries of the Bonsignori of Sienna, the Bardi and Peruzzi of Florence and the Fugger of Augsburg (Lopez 1979: p. 21). It was partly as a result of these early experiences of capitalist credit money's instability that the Mediterranean city states' plutocracies set up the early monopolistic public banks of deposit as a measure of protection for the

critically important function in war finance. These were established at Barcelona in 1401; at Valencia and Genoa in 1407; and most famously with Venice's Bank of Rialto in 1587. (When their practices were eventually integrated with those of the bill of exchange they became, as we shall see, the basis for the state banks' issue of credit money in the seventeenth century - most notably by the Bank of England in 1694 (Weber 1981 [1927]: p. 261).)

As we have already noted, loans to the city states, by banks that had a reasonably large number of depositors, 'monetised' the debts. Some loans were in cash, but many were merely entries in the current accounts, held in a bank of deposit, of the state's creditors. The banker was substituting his promise to pay the creditor on the basis of the state's promise to repay him. Suppliers of goods and services to the state could draw on the account to make their own payments by bank transfer. Money had been created out of debtor-creditor social relations (Mueller 1997: p. 42; Day 1999: pp. 67-8). This process depended on the trustworthiness of the banks which, in turn, relied on the legitimacy and viability of the state. For example, it was noted in late fifteenth-century Venice, that money would 'volatilize' - that is, evaporate - if the banks and state were not trusted (Mueller 1997: p. 425). In contrast to the conflict of interests between the sovereign and merchant bankers in the traditional monarchies (see Munro 1979), these early state-bank relations were established on the basis of mrra-class credit relations in the governing plutocracies of the Italian city states. They were borrowing from each other to finance their own advantage and security. Creation of 'infrastructural' power in this way depended on the solidarity and cohesion of the ruling oligarchy. Factionalism and subsequent political instability proved to be one of the chronic sources of fiscal and ultimately military weakness of these states. Politics and money were becoming entwined in new and more intimate ways that were eventually to be expressed in the kind of constitutional settlements that made possible the formation of such institutions as the Bank of England in 1694.

As ever, the continued expansion of bank credit money increased instability, and bank failures continued to have far-reaching effects in western Europe throughout the sixteenth century (Usher 1953 [1934]:p. 290; Boyer-Xambeu 1994). As we have already noted, the 'liquidity' problem of capitalist banking practice consists in the transformation of many small short-term deposits (bank liabilities), payable at short notice, into relatively longer-term loans (assets). There can be no complete or final solution to the liquidity problem in capitalist banking (Minsky 1986). Credit relations can rupture at any time; but before the widespread transferability of debt, banking was even more fragile. The

availability of creditable promises to pay that could be transferred impersonally to third parties made it possible to stabilise a liquidity problem by borrowing short term in the form of bills and notes from other banks. In addition, banks were then able to issue notes to the value of the promises to pay that were acceptable as means of payment. In other words, the solution lay in the construction of denser and more secure social foundations for the social relations that comprised capitalist credit money. The efficacy of these changes was only realised when these new 'social technologies' of credit money creation were established on firmer cultural and political bases. In particular, England gradually developed a civic culture of trust and legitimacy in which banks, as repositories for savings and issuers of creditable promises to pay, could flourish (Muldrew 1998).