HISTORY OF CAPITALISM

The origins of capitalism: 13th - 16th century

The underlying theme of capitalism is the use of wealth to create more wealth. The simplest form of this is lending money at interest, reviled in the Middle Ages as the sin of usury. At a more sophisticated level capitalism involves investing money in a project in return for a share of the profit. In the case of a single owner of an industrial enterprise (such as a factory), the system reveals a characteristic distinction. All the profits go to one man, though many others share the work. Full-scale capitalism results in an inevitable divide between employer and employed, or capital and labour.
In the Middle Ages the attitude of the church to usury means that capitalism has little chance of developing. Even so, this is the period in which its roots lie. With the rapid development of European trade and prosperity in the 13th century, cities in Italy and the Netherlands witness a creation of wealth which is capitalist in kind - because any merchant is in essence a capitalist, risking his pot of money each time he buys in one place to sell in another.
Florence in the 14th century demonstrates more familiar indications of capitalism. It has its great banking families, engaging in transactions across the breadth of Europe. It even has a successful strike, by underpaid day workers in the cloth industry who want a share in the benefits enjoyed by their employers. In the following century, in France, the story of Jacques Coeur provides an astonishing individual example of the rapid creation of wealth through skilful investment in foreign merchandise.
Such cases contain elements of later capitalism, but their limited scale makes them in a certain way different. There have always been markets, and no doubt in every civilization canny individuals have been able to use the markets to amass a quick fortune. The essential characteristics of capitalism only become evident with an increase in scale - in two quite separate contexts. One is the formation of joint-stock companies, in which investors pool their resources for a major commercial undertaking. The other, not evident until the Industrial Revolution, is the development of factories in which large numbers of workers are employed in a single private enterprise.
Chartered companies and joint stock: 16th-17th c.
Speculative trading enterprises in the Middle Ages are undertaken by individual merchants, operating in family groups or partnerships but acting essentially on their own behalf. Some, such as as the Polo family, are entirely independent. Others bind themselves voluntarily into guilds, such as the Hanseatic League, accepting certain regulations on their trade in return for the support of a powerful organization. In the 16th century, with the expanding energies of the Atlantic kingdoms in a new era of ocean voyages, the situation changes. In long expeditions to distant and dangerous places, both the risk and the potential profit are greatly increased. A new system is called for.
Merchants risking their fortunes in these unpredictable adventures need a special level of support. Equally it suits governments to encourage their endeavours, for the sake of increasing trade but also to extend the nation's reach through settlements and colonies overseas. The result is the chartered company. A charter, granted by the crown, gives the merchants in a company the monopoly on trade with a specific region for a given number of years - together with strong legal powers to enforce order in distant places while carrying out its business.
Such undertakings tie up large sums for money for long periods before any profit can be realized, in the capital cost of ships and the expense of their crews on journeys lasting months and sometimes years. A large number of speculators need to be persuaded to share the risk. The resulting organization is the joint-stock company, in which investors can contribute variable sums of money to fund the venture. In doing so they become joint holders of the trading stock of the company, with a right to share in any profits in proportion to the size of their holding.
The first joint-stock enterprise established in Britain is the Muscovy Company, which receives its royal charter in 1555. Of later ventures launched on a similar basis, the best known are the East India Company (1600), the Hudson's Bay Company (1670) and the South Sea Company (1711). Even the Bank of England, when founded in 1694, is organized at first on joint-stock lines. The merchants whose funds provide the bank's initial loan to the government acquire thereby a share in the stock of the new company.
The joint-stock principle can equally well be applied to unincorporated companies (trading without a royal charter), many of which are set up in the 17th century. Investors can buy into a company even if they have no personal link with its trading activities. By the same token an investor's share in the company's stock can be sold at whatever price buyer and seller may agree upon. With this concept, one of the basic elements of capitalism evolves. A natural next step is the emergence of specialist brokers, willing to arrange deals between buyers and sellers of shares in return for a cut on each transaction. In London the brokers gather at first in Jonathan's coffee house.
Calvinism and capitalism: 17th century
The development of capitalism in northern Protestant countries, such as the Netherlands and England, has prompted the theory that the Reformation is a cause of capitalism. But this states the case rather too strongly, particularly since the beginnings of capitalism can be seen far earlier. Nevertheless there are elements in Reformation thought which greatly help the development of capitalism. This is particularly true of the Calvinist variety of the reformed faith, which becomes the state religion of the Netherlands after the Great Assembly of 1651.
The most immediate way in which the Reformation aids the capitalist is by removing the stigma which the Catholic church has traditionally attached to money-lending - or usury, in the pejorative Biblical term. Calvinism positively encourages the purposeful investment of money, by presenting luxury and self-indulgence as vices and thrift as a virtue. It even subtly contrives to suggest that wealth may itself be a sign of virtue. This useful slight of hand is contrived with the help of the Calvinist doctrine of predestination. If certain virtuous people are predestined to be saved in the next world, then perhaps success in this one is an advance indication of God's favour.
Speculation: from the 17th century
Speculation is an intrinsic part of capitalism, since the capitalist must risk money in the hope of making more. When the risk is undertaken as a direct part of a productive enterprise (buying a machine to make something with, or a ship with which to trade overseas), it is easily recognizable as a straightforward business activity. But once a system of stockbroking is in place, enabling people to buy and sell a share in an enterprise or commodity with which they have no direct connection, the procedure becomes much closer to gambling - with all its attendant excitements and dangers.
History's first example of a speculative run on the market is the famous Dutch tulip mania of 1633-7. The first tulips seen in northern Europe arrive in Antwerp in 1562 as a cargo of bulbs from Istanbul. Though native in many parts of the world (from Italy to Japan), these flowers strike a particular chord in the Netherlands. Demand soon exceeds supply. Prices soar for a rare specimen. In the early 17th century a single bulb of a new species is recorded as constituting a bride's entire dowry. In 1633 the tulip market in Holland goes into a speculative spasm.
In a craze lasting four years, precious objects are pawned and houses and estates are mortgaged to buy rare tulip bulbs - not to grow them or enjoy the flowers, but to sell them on unseen at a higher price. Fortunes are made until the market crashes, in the spring of 1637, whereupon equivalent fortunes are lost. Tulip mania is like a satirical parody of a stockmarket boom and bust. Yet it happens in the real world well before any similar bubble in stocks and shares. The two earliest and most famous of such bubbles (dealing in pieces of paper of even less use than tulip bulbs if no one else wants to buy them) burst in the same year - in France and England in 1720.
London's coffee houses: from1652
The first coffee house in London opens in 1652. Soon much of England's business is being conducted in these congenial establishments where merchants can gather to strike their bargains over a cup of the newly fashionable liquid. Individual coffee houses, like clubs, acquire their own identity and clientele. Ship owners and sea captains congregate at Edward Lloyd's. Here they discuss terms with men who are prepared to take a gamble on the success of the next voyage, insuring it against disaster in return for a premium. Their circle develops into the insurance giant Lloyd's of London, retaining the name of the coffee-house owner.
At Jonathan's coffee-house there are customers with money to risk in a different way. These are the investors who take a share in a trading venture, accepting part of the risk in return for part of the profit. The enterprises in which they participate are joint-stock companies, of which the East India Company is one of the first. Others, chartered when the coffee-houses are already in business, include companies with monopolies for Hudson's Bay (1670), Africa (1672) and the South Sea (1711). Shares in such companies can be bought and sold at Jonathan's coffee house. The brokers who arrange the deals here call themselves (from 1773) the Stock Exchange.

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