EARLY EXCHANGE TRANSACTIONS:

COMMERCIAL PRACTICE

To understand the development of the law of bills, one must begin

by considering how merchants actually used bills in early com-
merce and what issues of economic and social policy were raised by
the transactions in which bills were used. The key to that inquiry is
to begin not with bills themselves, but with the exchange trans-
actions in which bills were used.

EXCHANGE TRANSACTIONS AS
MEANS OF FUNDS TRANSFER

Accustomed as we now are to highly developed systems of

communications and shipping, and specialized institutions for the
settlement of financial transactions, it is easy to overlook how
different the task of the merchant was in the era preceding all such
developments. The French historian Fernand Braudel has pointed
out that the problem of making returns is inherent in any form of
trade. 'Since exchange by definition means reciprocity, any
journey from A to B must be balanced by a return journey -
however complicated and roundabout - from B to A. The round
trip, once complete, forms a circuit. Trade circuits are like
electrical circuits: they work only when the connection is
unbroken.'1 In the modern world, the problem of 'making returns'
is a macro-economic phenomenon ordinarily discussed only at the
level of statistical measures of the aggregate flow of trade among
nations or regions. In earlier times, the problem of making returns
was a direct and immediate concern for every individual merchant.
In the earliest form of trade organization, making returns meant
simply carrying back the fruits of one's trading journeys. Mer-

1
Braudel, Civilization and Capitalism, 2: 140.
32
 Early exchange transactions: commercial practice 33

chants bought goods in one place, took them to a foreign market,

sold them, bought other goods with the proceeds, and then
returned home to sell the goods acquired in the foreign market.
Having no representatives in other locations nor any international
banking system to assist them in making returns, travelling mer-
chants sought to sell their goods and quickly acquire a return
cargo, either by direct barter or by purchasing the return goods
with the money proceeds of the sale of their goods.2
By the thirteenth century, a new form of trade organization
began to develop in which 'sedentary merchants' conducted their
affairs through a more complex organizational structure.3 In the
simplest form, the merchant would entrust the goods to an agent
or employee who travelled with the goods and arranged for their
sale and the purchase of a return cargo. In a more developed form,
the merchant had representatives who resided permanently in the
foreign market. The merchant could then ship the goods to the
foreign market on consignment to an agent who arranged for the
sale of the goods and purchase of the returns. As Braudel has
noted, 'By the end of the sixteenth century, the commission system
. . . was tending to become general. All merchants - in Italy or in
Amsterdam for instance — worked on commission for other mer-
chants, who did the same for them.'4
Bills of exchange had their origins in a new mechanism of
making returns that became possible with the transition to the
regime of the sedentary merchant and the development of the
commission merchant system.5 Suppose, for example, that an
Italian merchant shipped spices from Italy to his representative in
Flanders. Once the agent in Flanders had sold the spices, he would
have funds in Flanders due to his principal in Italy. Suppose that
another merchant in Flanders was in the business of buying
English wool and shipping it to Italy. Once the Flemish wool
merchant's agent in Italy had sold the goods, he would have funds
in Italy due to his principal in Flanders. The problem of making

2
Gras, Business and Capitalism, 39, 43.
3
Gras, Business and Capitalism, 37-44, 67—92; de Roover, 'The Commercial
Revolution of the Thirteenth Century'.
4
Braudel, Civilization and Capitalism, 2: 150. See also Willan, 'Factor or Agent in
Foreign Trade'; Westerfield, Middlemen in English Business, 350-62; Elder, 'The
van der Molen', 78-145.
5
Usher, Early History of Deposit Banking, 80-81; de Roover, Money, Banking and
Credit in Mediaeval Bruges, 49—51.
34 Early history of the law of bills and notes
returns could be solved by having the Italian spice merchant's
factor in Flanders pay money to the wool merchant, and the
Flemish wool merchant's factor in Italy pay money to the Italian
spice merchant. In effect, the Flemish wool merchant's outward
cargo would have become the Italian spice merchant's return
cargo, and vice versa.
The English economic historian Eileen Power gives a lucid
illustration of how such exchange transactions were used by the
English Merchants of the Staple, who sold English wool at the
markets in Flanders,
The Staplers could transfer their money home ... by bills of exchange
drawn upon the London offices of merchants who imported on a large
scale, and this was the method they habitually employed; they 'made it
over', as the phrase went, usually by means of the mercers, who were
importers buying heavily at the Flemish marts. The Staplers had Flemish
money in Calais, where they sold, and in the marts, where they collected
their debts; they wanted English money in the Cotswolds and London
where they bought. The mercers had English money in London, where
they sold, and needed Flemish money at the marts, where they bought. So
the Stapler on the continent delivered his money to a mercer and received
a bill of exchange payable at a future date in London in English money.6
An exchange transaction of this form would have involved four
parties. In Flanders, the Stapler (A), would deliver money to the
mercer (B). B would draw a bill of exchange on his representative
in London (C), making it payable to the Stapler's representative in
London (D). A would send the bill to D in London, who would
present it to C for payment, thereby completing the transaction. In
modern terminology, the parties would be described by reference
to their role on the bill: B would be called the drawer, C the
drawee, and D the payee. A, who would not have been a party to
the bill itself, would be referred to as the remitter. The termin-
ology commonly used in early exchange practice was somewhat
different, focusing more on the two parties who initiated the
exchange transaction than on the bill through which the exchange
contract was carried out. Thus, A, the party in Flanders who paid
the money, would have been referred to as the deliverer or remit-
ter, and B, the party who received the money, would have been
referred to as the taker.7

6
Power, 'Wool Trade in the Fifteenth Century', 68.
7
de Roover, Gresham on Foreign Exchange, 99-100.
 Early exchange transactions: commercial practice 35
Early exchange transactions bear some similarity to some
modern forms of funds transmission, such as when someone who
needs to send money abroad purchases a draft from a bank, drawn
on the bank's foreign correspondent. There are, however, impor-
tant differences. Modern exchange transactions are conducted
through specialized financial institutions, and the users of the
funds transmission service rarely, if ever, need to concern them-
selves with the details of how the service operates. By contrast, in
early exchange transactions the parties would frequently not have
been financial professionals, but merchants who sought out other
merchants whose trade flowed in the opposite direction. 8
Moreover, there is a sense in which 'funds transmission' is a
subtly misleading characterization of the problem faced by a factor
or other commission merchant in making returns to his principal.
The prototype modern commercial transaction giving rise to the
need for a funds transfer system is a sale of goods at a distance, that
is, the seller ships the goods to a distant buyer and the buyer
arranges to transmit the funds to the seller. By contrast, given the
hazards and slowness of both communication and transport in the
early commercial world, the prototype commercial transaction of
the period was not a sale at a distance, but the shipment of goods
by the seller to his foreign commission agent. The buyers pur-
chased the goods from the seller's commission agent and made
payment to the selling agent, either immediately or at the agreed
credit interval. That stage involved no international payment. The
problem of international funds transfers was not a concern of the
buyer, but of the commission agent who sold the goods.
Viewed from the perspective of the principal for whose account
the goods had been sold, the funds transfer problem is not how to
send money abroad, but how to get money back from abroad. In the
era before modern methods of communication and transport, any
method of getting funds back from abroad necessarily took time.
No merchant, however, would ever want to leave any portion of his
capital lying idle for any period of time. Thus, just as a Stapler

8
Supple, Commercial Crisis and Change in England, 84. Exchange transactions
were commonly handled through brokers. The entry on 'broker' in Postlethwayt's
Dictionary of Trade and Commerce notes that 'the exchange brokers make it their
business to know the alteration of the course of exchange, to inform the mer-
chants how it goes, and to give notice to those who have money to receive or pay
beyond the sea, who are the proper persons for negotiating the exchange with'.
36 Early history of the law of bills and notes
made money by investing his capital in wool bought in England
and shipping it to Flanders for resale, so too he would have wanted
to make productive use of his capital on the return leg of his trade
circuit. Thus, the wool merchant's funds transfer problem can be
described not simply as how to get money back from abroad but as
how to make profitable use of funds abroad.

EXCHANGE TRANSACTIONS AS FINANCE

One of the ways of making profitable use of funds, in any location,

is to lend them to another. Historians of medieval business prac-
tice, particularly Raymond de Roover, have shown that finance,
rather than simply funds transmission, was a central element of
early exchange transactions.9
According to de Roover, the antecedents of bills of exchange
were the notarial exchange contracts of the era when much of the
international trade of Europe was concentrated at the great fairs of
Champagne.10 From the thirteenth century it was common for
merchants to take up money in Italian cities in order tofinancethe
purchase of goods which they were to take to the fairs of Cham-
pagne, agreeing to repay the money at the next fair in Champagne.
These exchange contracts took a somewhat different form than the
later-developed bills of exchange. They were formal instruments
drawn up by a public notary, and the recipient of the money
himself promised to repay it rather than directing another to do so.
As European trade and finance developed beyond the stage of
travelling merchants exchanging their wares at periodic fairs, the
significance of exchange dealings as a financial technique greatly
increased. The early form of finance by exchange contracts payable
at the fairs was feasible only for merchants who planned to travel to
the fairs where they would be in a position to repay the funds. With

9
de Roover, Gresham on Foreign Exchange, 94—172; de Roover, Medici Bank,
108-41; de Roover, Money, Banking and Credit in Mediaeval Bruges, 48-75; de
Roover, 'What is Dry Exchange?'.
10
de Roover, Money, Banking and Credit in Mediaeval Bruges, 49-52. See also
Usher, Early History of Deposit Banking, 61—72; Blomquist, 'Dawn of Banking
in an Italian Commune', 69-75. Translations of several letters dating from the
1260s sent to and from the Champagne fairs by partners of a merchant banker
firm in Siena reporting on lending and collection activities and describing
market conditions can be found in Lopez and Raymond, Medieval Trade in the
Mediterranean World, 388-94.
 Early exchange transactions: commercial practice 37

the evolution of the system of sedentary merchants with per-

manent representatives abroad, this method of finance became
feasible for a far broader range of activities. Any merchant who had
regular dealings through factors or other representatives could
take up funds in his home location, giving a bill of exchange
directing his representative in another location to repay the
advance to the lender's representative in the other location.
Consider a hypothetical English merchant who has sold goods
through his factor in Flanders. Suppose that there is someone else
in Flanders who wishes to buy goods for export to England, but
lacks sufficient funds. If the prospective buyer could borrow the
necessary funds in Flanders, he could ship the goods to London for
sale, and then be in a position to repay the loan in London. The
needs of the two merchants are perfectly complementary. The
English merchant has funds in Flanders and seeks a profitable
means of returning them to London. The Flemish merchant seeks
a source of finance for a shipment of goods from Flanders to
London. The English merchant's factor in Flanders would deliver
the money to the Flemish merchant, who would draw a bill of
exchange on his factor in London, instructing him to repay the
value to the English merchant. Needless to say, one would expect
that the amount to be repaid in London would exceed the amount
advanced in Flanders, the difference being the interest paid by the
Flemish merchant on the loan. 11
The pricing mechanism of exchange lending was rather
complex, as indicated by the explanation given in a memorandum
prepared for an English Royal Commission on Exchanges in 1564:
And here we must note that the Exchange is the governor of prices of all
wares interchangeably vented between this Realme and the Low Coun-
tries, because the greatest quantity of wares transported either outward or
inward is bought by money taken up by Exchange, and also because,
although the wares be bought with his own money, in selling of his
hundred pounds worth of wares he Considered what gains he might have
made by Exchange of so much money, and he makes the price of his wares
accordingly or to some convenient overplus.
As for Example, one taketh up in Lombard Street 100 pound English for
usance at 22 shillings 6 pence flemish. Now transporting English wares
bought therewith into Flanders, he needeth make no greater price thereof

1
* Numerous examples of such transactions from the records of a family of English
wool merchants trading with Flanders are described in Hanham, The Celys,
189-202.
38 Early history of the law of bills and notes

but to Answer his Exchange, which Cometh to 112 pound 10 shilling

flemish, saving for a Reasonable overplus to bear his Charges and to
Answer his Stock.
Again for Example, one taketh up at Antwerp 110 pound 16 shillings 8
pence flemish for usance at 22s 2d flemish, for the Exchange at Antwerp
keepeth about 4d flemish under the Exchange in Lombard Street, and
transporteth strange wares bought therewith in to England. Now he must
need raise his price thereof, both to Answer his Exchange, which is a 100
pound English, and also for some reasonable overplus to beare his Charges
and to amend his stock.12
The examples given in the Royal Commission memorandum
may be explained as follows: The hypothetical English merchant
borrowed £100 in London to finance the export of goods to Flan-
ders. He would have drawn a bill of exchange on his factor or
correspondent in Antwerp, giving it to the lender in London, who
would send it to Antwerp for payment. The exchange rate was
22s 6d Flemish per pound English, so when the bill came due one
month later, the English borrower's factor in Antwerp would have
been required to repay 100 X 22s 6d, or £112 10s Flemish. Simi-
larly, the hypothetical Flemish merchant borrowed money in
Antwerp to finance a shipment of goods to England. The bill of
exchange that he would have given to his lender would have taken
the same form as the English bill, except that the location of the
parties would have been reversed. The merchant in Antwerp took
up £110 16s 8d Flemish, at the rate of 22s 2d Flemish per pound
English. Thus, when the bill came due, the Flemish merchant's
correspondent in London would have been required to repay the
loan in English currency, amounting to £110 16s 8d Flemish at
22s 2d to the pound, or £100 English.
The key to understanding the pricing of exchange lending trans-
actions such as these is that the exchange rate would always be
different in the two cities. Thus, in the Royal Commission

12
'Memorandum Prepared for the Royal Commission on the Exchanges, 1564', in
Tudor Economic Documents, 3: 347-48. The term 'usance' referred to the
customary period for which bills of exchange between particular places were
made payable. For example, the usance between London and Antwerp was one
month, between London and Spain, two months, and between London and
Italy, three months. Thus, the bills of exchange in the Royal Commission
memorandum example, payable at usance between London and Antwerp, would
have called for payment one month after date. Bills might also be drawn at
shorter or longer intervals, expressed, for example, as at half usance or double
 Early exchange transactions: commercial practice 39

examples the rate in London was 22s 6d Flemish per pound

English while in Antwerp the rate was 22s 2d. The difference
between these two exchange rates determined the effective interest
rate on the loans. As the Royal Commission memorandum puts it:
Here is also to be noted that when the Exchange in Lombard street for
usance goeth at 22s 6dflemish,and the re-exchange thereof at Antwerp for
usance goeth at 22 shillings 2 pence flemish, then thereby the English
pound is valued worth just 22 shillings 4 pence flemish, because the 2
pence more than the value for the Exchange in Lombard street is the hire
and the interest that the deliverer doth bargain to have for delivering and
letting out his English pound a month beforehand, and the 2d less than the
value for the Exchange at Antwerp is the hire and Interest cut off by the
deliverer for letting out and delivering of his flemish money a month
beforehand.

Perhaps the best way of unpacking that explanation is to consider

the transaction from the viewpoint of the lender. Suppose that a
lender in London lent £100 English at usance at the rate of 22s 6d
Flemish per pound English. When the loan was repaid one month
later, the lender's correspondent in Antwerp would have collected
£112 10s Flemish. Suppose that the lender in London had
instructed his correspondent in Antwerp to relend the money by
exchange from Antwerp to London. The correspondent in
Antwerp would have lent the £112 10s Flemish to someone in
Antwerp at usance at the rate of 22s 2d Flemish per pound
English, sending the bill of exchange from this second 'rechange'
loan to the London banker. When the second bill came due, the
London banker would have received English money amounting to
£112 10s Flemish at 22s 2d to the pound, or £101 11s 2d. Thus, in
the two-month period, the lender's £100 would have earned a
return of £1 11s 2d, equivalent to a bit over 9 per cent per annum.
The effective interest rate on exchange lending was determined
by the spread between the exchange rates quoted in the two
different cities, not the absolute level of the exchange rate.13 For
instance, Malynes* seventeenth-century book on mercantile affairs
gives an example of such an exchange transaction where the
exchange rates were 34s 6d Flemish per pound in London, and
33s 6d per pound in Amsterdam.14 Assuming that these figures, as

13
de Roover, Gresham on Foreign Exchange, 141-50; de Roover, 'What is Dry
Exchange?', 187-94.
14
Malynes, Lex Mercatoria, 269-70.
40 Early history of the law of bills and notes
well as those in the Royal Commission's report, corresponded
roughly to actual rates prevailing at the times they were written,
the change in the rates reflects two different kinds of change in
economic condition. First, the value of the English pound had
risen against the Flemish pound. Secondly, the spread between the
rates as quoted in England and the Low Countries had increased,
from 4 pence in the examples in the Royal Commission's report in
1564 to 1 shilling in the example in Malynes. At the rates in
Malynes' example, a lender would have earned nearly 18 per cent
per annum on exchange lending.
Exchange lending played a key role in the European financial
system at least until the early seventeenth century. For example, in
the passage from the 1564 report of the English Royal Commission
on Exchanges quoted above, it is explicitly stated that most of the
import and export business between England and the Low Coun-
tries was financed 'by money taken up by Exchange*. Financing
trade by exchange formed a principal part of the business of the
great banking firms of Renaissance Italy, such as the Medici.15
Exchange lending, in the form of exchange and rechange or
'ricorsa* bill transactions, was a major part of the business of the
financiers of the fairs of Lyons and the Antwerp bourse.16
Exchange dealings were essential to the financial operation of the
major governments of Europe. The Spanish wars in the Low
Countries were financed in large measure by Genoese bankers who
financed the shipment of Italian cloth and goods which were sold
for distribution throughout northern Europe at the fairs and
markets in the Low Countries. Thus, the Genoese bankers had
funds due to them in Antwerp, which they could lend to the
Spanish crown for the expenses of the wars, receiving payment of
the advances in Spain or Italy from the silver coming to Spain from
the rich mines of South America.17 The English crown too was a
major borrower in Antwerp. Queen Elizabeth Ts most trusted
financial adviser, Sir Thomas Gresham, spent a large part of his
career arranging exchange lending transactions for the crown on
the Antwerp bourse.18
15
de Roover, Medici Bank.
16
Ehrenberg, Capital & Finance in the Renaissance, 244-46, 287-88.
17
Braudel, Civilization and Capitalism, 3: 164-69.
18
de Roover, Gresham on Foreign Exchange, 18-30; Ehrenberg, Capital & Finance
in the Renaissance, 252—55.
 Early exchange transactions: commercial practice 41

THE DUAL FUNCTIONS OF EXCHANGE

Having described exchange transactions as serving the two func-

tions of funds transfer and lending, it may be appropriate to
consider briefly the relationship between these two functions and
their relative significance. There is certainly ample evidence that,
in some situations, the funds transfer aspect of exchange was of
primary significance. For example, pilgrims and other travellers
often sent funds abroad by purchasing bills of exchange drawn by
Italian merchant bankers in London on their correspondents
abroad.19 Merchants too in some situations used exchange solely as
a means of funds transmission. A late-sixteenth-century memoran-
dum prepared by a group of Italian merchants residing in London
describes a variety of such transactions.20 For example, Italian
merchant bankers in London sold bills of exchange on Bordeaux to
English vintners who needed to make payments to Bordeaux mer-
chants for wine imported to England.
The pricing mechanism of exchange transactions in which
bankers provided funds transfer services to merchants and others
is somewhat puzzling. Given the pattern of exchange rates
described above, it would seem that bankers who sold bills of
exchange would have lost money on every such transaction, for
their agents abroad would have paid out more value in the foreign
currency than they had received from the purchasers of the bills.
The explanation may be that the early bankers were interested in
selling bills of exchange whenever they believed that they could
profitably use the funds. The merchant manuals of the time indi-
cate that the bankers were aware of regular seasonalfluctuationsin
the supply and demand for funds in the various commercial
centres of Europe and kept a careful eye on trade conditions,
currency regulations, and the like in an effort to anticipate shifts in

19
There are a number of cases in the London Mayor's Court Rolls in the fourteenth
and fifteenth centuries involving travellers w h o bought letters of exchange
payable at their intended destinations but failed t o complete their journeys
because of sickness or death. Calendar of London Plea and Memoranda Rolls,
2: 77, 3: 200, 4: 13, 4: 226. T h e cases seem to have been quite uncomplicated,
the only issue being factual disputes about whether the money had already been
paid out abroad.
20
'Protest by the Italian Merchants of the City against State Control of Exchange
Business, 1576', in Tudor Economic Documents, 2: 1 6 9 - 7 3 .
42 Early history of the law of bills and notes
the money market.21 The desire of the bankers to borrow funds to
augment their capital or to adjust the state of their balances among
the various cities in which they operated would mean that they
were often interested in taking up money in one location to be paid
out in another. Thus, bankers might have been willing to sell bills
to persons who wished to transfer funds to distant locations for
essentially the same reason that banks today pay interest on
deposits.22
Though there is evidence that in some situations the funds
transfer aspect of exchange may have been predominant, there is
no question that in other situations the lending aspect was the
critical function of exchange. It may, though, be misleading to ask
whether the funds transfer or finance function of early exchange
transactions was more important. In many situations these were
not two different practices but simply different descriptions of the
same phenomenon. Consider, for example, the exchange trans-
actions in which the Merchants of the Staple who sold English
wool in Flanders made return of their funds by buying bills of
exchange from merchants in Flanders who shipped goods to
London. From one perspective, this can be described as the
mechanism by which the Staplers' agents in Flanders transmitted
the proceeds of the sales of wool back to their principals in
London. Yet someone who took up money in Flanders giving a bill
of exchange for it on his correspondent in London would ordinar-
ily be paying a price for the use of the funds between the time the
funds were taken up in Flanders and the time that they were paid
out in London. Or, looking at the exchange transaction from the
other side, someone who delivered money in Flanders in return for
a bill of exchange on London was hoping to make a profit on the
21
de Roover, Money, Banking and Credit in Mediaeval Bruges, 66—67.
22
Another possible explanation is provided by Peter Spufford, w h o has compiled
data on exchange rate quotations throughout Europe in the medieval period.
Spufford notes that some exchange quotations between different cities do not fit
the pattern described by de Roover in which, for example, the exchange rate
between English and Flemish currency, stated in terms of Flemish shillings per
English pound, would have been higher in London than in Flanders. Spufford
notes instances in which the difference is in the opposite direction, so that o n e
buying a bill in one place would effectively receive less value in the other location
when the bill came due. From this data Spufford suggests that there may have
been 'two sets of rates for bills of exchange, o n e for . . . those w h o wished to
transfer funds, and the other for "exchange", for those w h o wished to invest
funds'. Spufford, Handbook of Medieval Exchange, xliii.
 Early exchange transactions: commercial practice 43
use of the funds during the period. When an English wool mer-
chant instructed his factor in Flanders to make returns by buying
bills in Flanders drawn on London, rather than by shipping specie
or goods, he was making an investment decision as much as a funds
transfer decision. Accordingly, the exchange transaction would
have been both a form of funds transfer and a form of lending.