Bills of Exchange, Medieval and Modern
1. The Confusion
There exists a widespread confusion regarding the financial instrument known as a “bill of exchange.” Simply put, many authors are so confused about these instruments that they describe them going the wrong way around. Even authors that describe the basic direction of the transaction correctly sometimes err in their designations of the various roles in the transaction (drawers and drawees, payers and payees, etc). This state of affairs is so puzzling to the would-be student of financial history that they are liable to throw up their hands and abandon the attempt to understand bills at all.
The purpose of this essay is two-fold: first, to dispel the confusion, and second, to offer an hypothesis about how this confusion arose. The origins of the confusion are perhaps even more interesting than the confusion itself, since they seem to lie in the specific conditions of the Atlantic slave-trade.
To those accustomed to modern financial instruments and means of payment, what is prima facie confusing about bills of exchange is how it is possible to “pay with” a bill. One imagines that it would be possible somehow to “pay with” a bill of exchange in the same way that one might “pay with” a coin or a banknote, in the sense that the one who is to pay somehow tenders or remits the physical object mediating payment to the one who is to be paid.
This is the confusion that seems to underlie, for example, the diagram of a transaction in bills given on page 6 of Larry Neal’s The Rise of Financial Capitalism, which is a particularly egregious example of the confusion about bills and likely the proximal cause of much of the confusion in the literature, given that Neal is regarded as an authority on the topic in the economics department.1 Neal seems to have taken the collection of terms of art associated with the exchange by bills and tortured them into an arrangement that would make it possible for the transaction to work how he imagined it should: as enabling the remittance of a payment object from the debtor to the creditor in a commercial transaction. Neal thereby transforms the bill of exchange into a kind of banknote issued by corresponding deposit bankers.
Unfortunately, this is totally incorrect. Fortunately, it gives us a simple starting place to begin clearing up the confusion: A bill of exchange is not a note. It’s a bill. And notes are notes and bills are bills.2
The surest way to avoid error in trying to understand the exchange by bills is to keep in mind that the bill is a “bill” in exactly the same way that we use the word today: it is a letter sent by the creditor to the debtor regarding the final settlement of a transaction in goods that has already been performed. In other words, the difference between notes and bills is that notes are written by debtors, while bills are written by creditors. Last week I called the plumber to come unclog my pipes, and today in my mailbox I have received a bill, informing me of the fact that I have already received the performance of a service for which I must now pay. The bill of exchange is a bill in precisely this sense, with the added feature that it, in itself, constitutes a mechanism through which the creditor sending the bill can get paid.
In the case of my plumber, I will pay them, subsequent to receipt of the bill, through the deposit banking system, by informing my bank that I would like some of my deposits to be signed over to the account of the plumber, at which point the plumber will consider themself paid. But the exchange by bills emerged in a context in which this banking infrastructure did not exist (for the simple reason that it was not legal), with the important implication that the whole point of a bill of exchange is that it enables the remittance of funds without the participation of deposit bankers. There was, to be sure, a species of banker involved in the market in bills — the exchange banker — but their business was entirely different. The exchange banker, as we will glimpse a little later, was really a kind of dealer.
2. The Medieval Bill of Exchange
In order to understand how this might be possible, we should begin by considering the simplest or “original” case: the exchange by bills in a context of bilateral trade between two countries and in which usury is legally prohibited. What is usury? Technically, usury is the pricing of usance, which refers to the period of time between the acceptance of the bill (we will define this term shortly) and its maturity or the date at which it falls due. More abstractly, we can understand the prohibition of usury as a prohibition on the pricing of one money in terms of itself, by quoting a price for money X (pounds sterling) now in terms of money X (pounds sterling) later.
We should not pass by this definition of usury without noting that the most commonly given definition — that usury is the prohibition of interest — is entirely misleading, as is the description of all profits from any financial transaction as a form of “disguised interest.” That is because the charging of interest (or interesse) was quite distinct from the pricing of usance, and it was legal under usury laws. This charge referred to a penalty that was assessed for failure to pay a bill that had fallen due, and thus was understood under canon law as pricing risk rather than time and was therefore a licit transaction. The pricing of usance is the pricing of the time between acceptance and maturity, while the pricing of interest is a charge assessed for nonperformance after maturity, with the result that pricing usance constituted a guaranteed profit for the lender while pricing interest did not.3 Thus, what we call “interest” they called “charging for usance,” and what they called “interest” we call a “late fee,” and neither of these categories are jointly or singly exhaustive of all the potential forms of profit that might be harvested from financial transactions. These distinctions are important because, without them, we cannot adequately appreciate the way that usury laws were a form of financial regulation, rather than an outright prohibition of finance as such.
At this point, then, we should define what is meant by “acceptance” and outline the basic structure of a licit transaction in bills from the perspective of the participating commercial merchants. Let us begin by trying to get a handle on the terms of art that are such a stumbling block for modern students of the topic. The terms are in fact much less arcane than they seem at first, as we will be able to see if we begin by trying to acquire an intuitive sense of what the words mean before trying to arrange them into a diagram. Let us begin by considering two actions — “drawing” and “paying” — each of which imply an active and a passive agent: the drawer and the drawee, and the payer and the payee. Simply, the “drawing” of a bill initiates the life cycle of a bill of exchange, while the “paying” of the bill closes it out, and everything else happens in between.
A licit transaction in bills (there are also illicit transactions that we will consider later) must always begin with the completed performance of a transaction in goods. So let us imagine a situation in which there are two merchants: Albert is a merchant in London engaged in the export of wool, and Bernard is a merchant in Antwerp who is importing the wool. Bernard is in receipt of a shipment of wool from Albert which has not yet been paid for, with the result that Bernard owes Albert money. To put it in a way that is more useful for our purposes (i.e. to put it the “right way around”), we might say that Albert holds balances abroad, with Bernard, as a result of a prior non-financial transaction. This fact gives Albert the opportunity to “draw on” these foreign balances by “drawing” a bill “on” Bernard in Antwerp, which means that Albert is the “drawer” and Bernard is the “drawee.” Understanding this allows us to clear up one source of confusion: “drawing” refers not to the “drawing up” of the bill as a piece of writing, but rather to “drawing on” foreign balances in the way that one “draws on” a resource (this usage survives in modern banking when we speak of a check that is “drawn on” a deposit account).
In order to do this, it is likely (though not strictly necessary) that Albert will engage the services of an exchange banker. He will go to Lombard Street, which is called that because that’s the place where you can find the Italians who are engaged in the business of exchange banking. Albert’s goal is to transform his “absent money” (funds that he holds with Bernard in Antwerp) into “present money” (English coins in his pocket in London) and the Italian firms can help him do this in virtue of the fact that they have a network of branch offices in all of the major exchange centers. At Lombard Street, Albert will find bidders for the purchase of his bill drawn on Bernard: the exchange bankers will compete with one another to offer to pay Albert cash in exchange for his bill, by which he instructs Bernard to “pay” the balance owed him to the Antwerp correspondent of the London exchange banker. Thus, Bernard, the “drawee,” is also the “payer,” and the “payee” is the Antwerp partner of the London exchange banker who purchases or “takes” the bill, after which he will “remit” the bill by ship to the Antwerp partner, who will then “deliver” the bill to Bernard, the drawee and payer, who must then either “protest” or “accept” the bill.
If the bill is “protested,” it becomes a matter of litigation between the various parties (and possibly leading to a souring of the business relationship between Albert and Bernard). Thus, the bills of exchange are not anonymous instruments, and gathering the information required to assess the creditworthiness of Albert and Bernard would be essential to the business of the exchange bankers. But if the bill is “accepted” by Bernard upon delivery, then this means that he has both accepted his liability to Albert (has acknowledged that Albert does in fact hold balances with him) and has confirmed his intention to pay the bill upon maturity, at the conclusion of the period of usance. The bill of exchange, in other words, is not a demand instrument: upon being presented with the bill, Bernard has additional time to raise the funds to pay the bill (perhaps one or two months), and this period of time, the “usance,” is the period of time for which charging a price would constitute “usury.”
Let us now consider the difference between the points in time before the drawing of the bill and after its payment. At t=1, Albert goes to the office at Lombard Street and sells his bill to the banker there, who sends it to Antwerp. Later, at t=2, the banker in Antwerp presents the bill for acceptance to Bernard. Still later, at t=3, the bill matures and Bernard pays it. At the conclusion of this sequence, what has changed about the world and the balance sheets of the various participants? As far as Albert and Bernard are concerned, the story is over. Albert got some cash from the banker in London, and Bernard paid some cash to the banker in Antwerp, which, from their perspective, has the same result as if Bernard had paid Albert directly, which is what they wanted to do.
For the exchange bankers, however, things are not quite over yet, because the banking house as a whole is now short cash in London and has an unfunded long position in cash in Antwerp. Eventually, then, they would need to either ship cash from Antwerp to London (thus undermining the whole purpose of the exchange by bills of obviating shipments of coin or bullion), or they will need to engage in a “rechange” or matching transaction going the other way. They would, in other words, need to find a pair of merchants that mirrored Albert and Bernard: an exporter in Antwerp, Christoffel, who held balances with an importer in London, Digby. Thus, the Antwerp banker could purchase Christoffel’s bill drawn on Digby, thereby moving the unfunded cash position off their books, and remit the bill to the London banker, who would then present it for acceptance to Digby and, after it had been paid, cover the short cash position left over from making the original purchase of the bill drawn by Albert.
At the end of this combination of exchange and rechange, the books of the exchange bankers would be netted out and they would be left with a profit, due to the fact that there existed a spread between the price of Antwerp money quoted in London and the price of London money quoted in Antwerp. This means that, in the language of the Treynor model of the dealer market, the exchange bankers were quoting an “inside spread” for the international money market, thus acting as “dealers” who were able to “pick up the spread” due to the fact that they were transacting with commercial merchants who, as “time investors,” were forced to “cross the spread” and thereby pay a “liquidity premium” to the dealer market for the privilege of doing so.4 This “inside spread” at the exchange was, moreover, “inside” in relation to the “outside spread” being formed by the interaction between the mints in the two countries, each purchasing bullion for coin at the mint window and thereby setting a nominal premium on domestic money. This topic — especially that of the policy stance of the mint — is complex and cannot be treated fully here, although we will return to the issue of the exchange spread when we come to the use of bills of exchange in the Atlantic system a little later. (The reader who wants to understand more fully what this paragraph says should consult Boyer-Xambeau et al. Private Money and Public Currency, the lectures of Perry Mehrling on the “Economics of Money and Banking,” as well as my dissertation, The Difference that Money Makes).
Here, however, we do not need to fully understand the mysteries of the market in bills of exchange as seen from the perspective of the exchange bankers. We simply need to understand how it appeared from the perspective of their clients, the commercial merchants, who used the system to remit funds to one another without having to take the risk and expense of shipping coin and bullion. The crucial point here, and the basic thing that so many authors seem to be confused about, is that it is the creditor who initiates the transaction by writing a letter to the debtor, rather than the other way around. The commercial merchant who is the one getting paid is the one who initiates the entire transaction, and the merchant who is the one paying merely receives the letter and then either accepts it and pays it or subjects it to a protest.
In each half of the exchange and rechange, the commercial merchants making use of the system experienced only one half of the exchange spread, which they saw as the “exchange rate” between the two monies. This rate would determine the amount of London money that Albert would be able to realize in exchange for his foreign balances in Antwerp, or the amount of Antwerp money that Christoffer would be able to realize in exchange for his foreign balances in London. But the profit of the exchange bankers depended upon the fact that the exchange rate between two cities was not the same in each of the cities, and thus there really existed an exchange spread, rather than a simple rate: a spread that was visible only from their perspective at the “height” of the system.
It is for this reason — the fact that the exchange bankers are playing the role of dealers in foreign exchange — that any diagram of a transaction in medieval bills of exchange involving only four parties is inherently incomplete. There must be six agents involved (although it is sometimes possible for one party to play two roles), due to the fact that, from the perspective of the exchange bankers, the transaction was completed (and the profit could be priced) only upon completion of the rechange. The exchange, in itself, is like the sound of one hand clapping, and cannot really be said to exist independently of the rechange that completes it.
There are, however, situations in which the “ideal” form of a licit transaction in the exchange by bills might collapse, and in which the full six-agent diagram might collapse into a four-agent diagram. These are situations in which the profit for making the market is coming from “somewhere else” (that is, from somewhere other than the inside spread), with the result that it might be possible to “price” the exchange purely as a one-way transaction rather than as a change-and-rechange. One of these situations is that in which usury is legal, as we will consider in just a moment. Another is when the profits for making the market are being supplied by the fiscal activities of a state and new supplies of outside money, as seems to have been the case with the Genoese-Habsburg alliance and the “American treasure” of the sixteenth century (I discussed this topic in The Difference that Money Makes and will avoid it here). The third situation, which will we consider in the final section of this essay, is one in which the market in exchange is being funded by the activities of investment bankers, as seems to have been the case in the Atlantic slave-trade.
To sum up this section, then, we can say the following. A bill of exchange is always, without exception, as I have described it here: a letter drawn by a creditor on a debtor, commanding payment in cash to a third party of the balances owed. Anything that does not meet that definition is not a bill of exchange, but something else. This is sufficient to clear up the confusion pervading the literature about the polarity of the exchange transaction, and the logic behind the names of the various agential roles. It does not, however, explain how this confusion arose, because there are reasons for it other than simply the negligence of scholars (although this certainly plays a part). These reasons have to do, first, with the additional features gained by bills of exchange in a legal context permitting usury, and second, with the structural role they played within the “triangular trade” of the Atlantic system. These considerations are what differentiate modern bills of exchange from their medieval predecessors.
3. The Difference that Usury Makes
In order to appreciate the differences between medieval and modern bills of exchange, we need to return to the topic of usury. Recall that usury is the pricing of the time between acceptance and maturity. The fact that this was prohibited under canon law meant that the exchange bankers could licitly and profitably engage in business only in transactions across two different monies. A non-usurious bill of exchange is, necessarily, a contract that prices one money (a national unit of account) against another money (a different national unit of account), and in two different places. Thus, all licit medieval bills of exchange are “foreign” bills, as opposed to “inland” or “dry” bills.
In order to see why the prohibition on usury had this effect, it is easiest to begin by considering the case in which usury is not illegal. Simply put, if it is not illegal to price the period of time between acceptance and maturity of a bill, then it might become attractive to discount accepted bills. Once the drawee (and payer) of the bill has been presented with the bill and has accepted it, they acknowledge liability for the funds falling due at the expiration of the usance period. The question is what the deliverer (i.e. the payee) of the bill chooses to do in the intervening time.
If usury is illegal, there is not much they can do except wait. But if it’s legal, they have another option: the possibility of finding somebody else who is willing to discount the bill, or purchase it for less than its face value at maturity. This activity is usurious precisely because it prices the time between acceptance and maturity. There is no reason for the discounter to purchase a bill at its face value, since they would thereby be trading “down the hierarchy of money” for free, by exchanging cash for a mere promise of cash. But if the discounter could legally purchase the bill for below its face value at maturity (thereby pricing one money in terms of itself) then they would benefit from harvesting a yield in between t=2 and t=3.
Once usury is legalized, then discounting becomes an option, transforming accepted bills of exchange into the equivalent of notes that could then circulate as a monetary instrument among those who trusted in the creditworthiness of the acceptor. If Digsby has accepted this bill drawn on him, which means he has promised to pay it in 30 days, and you and I both know and trust Digsby, then we can begin to treat the accepted bill as a form of near-money, discounted by the distance to maturity and the level of trust in Digsby. Alternatively, the bill might be discounted and accepted by a bank specializing in such business, which purchases Digsby’s bill from the deliverer at a discount, accepts it (thereby making itself liable for its performance), and then resells it at a profit (i.e. for a lower discount). In this way, the deliverer would be able to more rapidly close out their position by liquidating the bill drawn on Digsby without waiting for maturity, by selling the bill for less than it would be worth (from Digsby directly) if they were willing to wait. This makes it possible, in a way, to “pay with” a bill of exchange: if you are the deliverer of a bill (meaning that you hold that bill as an asset) then you might be able to find somebody who will accept the transfer of that asset as a means of payment. But you can never “pay with” your own bill of exchange. You can only “pay with” somebody else’s bill, which you hold on your books as an account receivable.
Discounting is in effect a loan for usury at short term against the bill as collateral. The discounter pays money to the deliverer in exchange for the bill, which, having been accepted, holds the drawee legally liable for funds in excess of the amount paid at the discounting. This transaction enables the deliverer to clear their balance sheet and the discounter to harvest a yield. But it also means that the banking system, within the domestic monetary space, has been permitted to “break” the unit of account by opening up a spread within the unit of account across time and, therefore, also across space. This means that the value of the domestic unit of account (e.g. pound sterling) can be different in different places — specifically, between the city-bank and the country-bank — and that it therefore becomes possible to have a market in “inland” bills that can be used to finance domestic production as well as international commerce.
The “inland” bill is what happens when what was once called “dry” exchange gives up its pretense, because it is no longer necessary to disguise the fact that the transaction is usurious. Dry exchange is a transaction that makes a pretense of abiding by the rules of canonically licit exchange: the exchange of one money in one place for another money in another place. Thus, the borrower, Edward, sells a bill to the banker, who remits it to a partner abroad. By prearrangement, however, that partner simply draws a new bill on Edward for a later date and for a greater amount, which Edward has agreed in advance to recognize. Thus, the net effect of these transactions is simply a short term loan, in which Edward receives cash from the banker in exchange for a greater amount of cash at a later date. Thus, the profit due to the banker is not an an arbitrage on the exchange rate spread, as it was in the licit transaction, but simply a usurious charge on the term of the loan.
It is worth noting as this point that Larry Neal gives a correct diagram of a dry exchange transaction on page 8, immediately following his incorrect diagram of a “normal” exchange, but would like us to believe that this constitutes something that he refers to as an “innovation” in the history of finance — becoming suddenly possible after “the Portuguese Jews and various Protestants” were “expelled from Antwerp in 1585” (7). This, however, is a bit like saying that the United States in 1999 “innovated” the idea of combining commercial banks and investment banks, when what really happened is simply that it repealed a law that had previously been prohibiting it. Medieval bankers, in other words, were perfectly aware that it was possible to construct a short term loan through the combination of two opposing exchange transactions: it was prohibited, they did it anyway, and they were punished for doing it. Thus, the legalization of usury and the development of a market in inland bills is not an “innovation” story but rather what we could more precisely call a story about “re-regulation.”
How does the legalization of usury enable the establishment of a market in inland bills? The answer is that without legal usury it would be impossible for the exchange bankers to harvest a profit from making the market, and thus no reason for them to do so. As we saw (however briefly) in the previous section, the profit of the medieval exchange banker from a licit transaction derived ultimately from the existence of an exchange rate spread, whose ultimate source was the seigniorage charged by the mints and thus the premium that they conferred upon their domestic money. But suppose that there is a merchant in Lancashire who wishes to draw a bill upon balances owed to them in London. In order for the exchange banker to be interested in this business, they would have to be able to purchase the London balances, in Lancashire, for ready cash of an amount smaller than the face value of those balances, in London. But this would mean that one money — the pound sterling — was being priced in terms of itself, in two different places both subject to the same monetary jurisdiction! Thus the value of a “pound sterling” would be different in Lancashire than it was in London, in the same way that a florin in Flanders was different than a real in Spain. And this state of affairs might seem to be an affront to the sovereignty of the English crown, and its power (or commitment) to enforce the identity between words and things by ensuring that the term “pound sterling” referred to the same thing everywhere in its domain. It was precisely this that the medieval prohibition on usury and dry exchange prevented: the breaking of the par of the domestic unit of account by allowing it to float against itself across time and space as a result of being priced by a private money market.
However ontologically scandalous it might seem, the process of re-regulation in Protestant Europe in the sixteenth and seventeenth centuries legalizing usury up to a maximum rate had an important consequence, which is that it allowed for more flexible financing of the industrial value-added hierarchy within a country in the absence of the vertical integration of this hierarchy within a single firm. It became possible, in other words, for the spinner to finance the purchase of raw wool through a bill drawn on the proceeds of the sale of thread, for the weaver to finance the purchase of the thread by a bill drawn on the proceeds of the sale of cloth, and so on. Thus, the fact that banks could make a profit by discounting bills meant that they could facilitate the more rapid movement of funds flowing in an opposite direction to the flows of raw to intermediate to final goods. This meant that the bankers making the market in bills by standing ready to purchase them at a discount were ultimately deriving the profit of their operation not from an arbitrage on exchange spreads produced by seigniorage charges, as had their medieval forebears, but by taking a cut of the ultimate profits of industrial capital. This was, in a way, still the harvesting of an exchange spread, but it was an exchange spread that had been allowed to become internal to the domestic unit of account itself.
4. Unholy Triangle
The possibility, opened up by the legalization of usury, of allowing accepted bills of exchange to circulate as near money at a discount in between acceptance and maturity is one possible source of the modern confusion about the polarity of the instrument. The acceptance (whether that of the drawee or of a discounting bank) of the bill transformed it from a bill of the drawer into a note of the drawee/acceptor that could then be negotiated and serially endorsed within the local community of merchants, transforming all of the endorsers into jointly liable guarantors of the note’s payment. But it is crucial to remember that this “note” began life as its opposite, a bill: as a mechanism through which a creditor elsewhere could sell their absent balances for cash. For every accepted bill in circulation, somebody elsewhere — the drawer — had already been paid cash for it. It is that fact that made the instrument a “bill of exchange” rather than an instrument of another type.
There is, however, an additional reason for the confusion about the nature of these instruments, which is the role they played in the “triangular trade” of the Atlantic chattel slavery. Due to the structurally asymmetric nature of this trade, bills of exchange went only one direction — from the West Indies to England — and thus it began to look as though they were being used to “pay for” the import of enslaved Africans in the same way as a check or banknote might. This, however, is an illusion caused by not properly “following the money” and the microstructure of the entire chain of transactions.
Kenneth Morgan, in an otherwise useful essay (“Remittance Procedures in the Eighteenth-Century British Slave Trade”), gets the mechanism of transaction by bills nearly right, but makes one small error of terminology that obscures an important feature of this money market.5 Morgan describes the process like this: “A hypothetical example pertinent to the slave trade will illustrate the flow of such bills. A West Indian factor (the drawer) would purchase a bill from a local merchant or planter and transmit the paper note to a British slave merchant (the payee), or to someone to whom the payee had endorsed the bill. That person would submit the bill to a British merchant, bill broker, or bank (the payer and drawee) for acceptance” (724).
A reader who has been paying attention so far will now be in a position to spot Morgan’s error.
I’ll give you a moment to think about it.
Don’t just take my word for it.
Hopefully, you’ve noticed that it cannot possibly be correct that the West Indian factor (which is to say, the local “dealership” for slaves) was the “drawer” of the bill. Otherwise it would be unclear why the factor needed to purchase the bill from a “local merchant or planter” in the first place. The drawer of a bill is one who has balances abroad on which they are able to draw. Clearly, here, it is not the factor who holds balances in England on which the bill is drawn, but the planters, which is why the factor needs to purchase the bill from them in order to pay the captain of the slaving ship.
Now then, let us reconstruct the logic of this trade so that we can understand exactly what is going on, which will then illuminate certain phenomena that may be of some theoretical interest beyond the more narrow technical problem of how to avoid making mistakes about bills.
The best place to begin is to consider the business relationship between three distinct parties, all of whom are present in the West Indies: the captain of the slaving ship, the factor, and the planters. Ultimately, the slaves are being sold by the captain to the planters, but the factor is standing in between them as a middleman. There is a role for this middleman due to the fact that the captain of the ship would like to unload his cargo and begin the next leg of the trade, back to England, as soon as possible. The captain is a wholesaler of people, while the factor is their retailer. Thus, the question is how the factor can fund the purchase of the slaves at wholesale so that the captain can be on his way. In the West Indies, payment in coin was practically impossible, since there simply wasn’t enough specie to go around. Another option might be payment in goods, which the captain would then take to England to sell.6 But the best option would be bills of exchange drawn on London, which the captain would then be able to take there and have exchanged for cash, at which point his “triangular trade” would be closed out and ready to begin anew.
In order for this to be possible, there would have to be someone in the West Indies holding balances in England upon which the bills could be drawn. This person was not the factor, but the planter, for the simple reason that these balances were the proceeds from sales of the planter’s products that had been previously sold in England. The planter’s business was to import slaves and export molasses. Moreover, despite the fact that the people being enslaved came from Africa, they had to be paid for in England, since the African vertex of the triangle was simply a spot market at which rum, guns, and cowries were being exchanged for people. Thus, part of the asymmetry of this system lay in the fact that, while the flow of goods was triangular, the flow of funding was purely bilateral — between England and the West Indies and not involving Africa at all.
Thus, the factor stood in between the planter and the slaver not only as a middleman in goods, but as a middleman in credit as well. In order to pay the captain, the factor would try to find local planters who held balances in England as the proceeds for their exported primary goods that they would like to sell for cash in the local money. Thus, the planter would “draw” a bill on England, and the bill would then be purchased by the factor for local cash and tendered to the captain in payment for the delivery of slaves. Importantly, because the planter was likely to be unknown the captain, who would then be unable to assess the creditworthiness of the claim on English balances represented by the bill, the factor would offer their credit (and that of their firm) as security. This is likely the source of the confused statement that the factor himself was the “drawer” of the bill. The “drawer” was the planter, but the bill would be “drawn up” on the factor’s letterhead, by which means the factor and his firm would underwrite the credit of an otherwise obscure colonial planter.
If the bills were protested by the drawee upon arriving in England, then the captain might be able to receive payment from the England office of the factor’s firm, who would not wish to see their reputation damaged by the fact that their colonial factor had passed a bad bill (which is to say a bill drawn by a colonial planter on balances in England that did not actually exist). At this point, the bill would begin to look like a simple check issued by the factor promising payment from the funds of their own firm. But a colonial factor who persisted in passing bad bills would likely not be a factor for much longer. Thus, it is easy to see why credit assessment of the local planters was a central aspect of the job.
Understanding the details of these transactions is important because it allows us to grasp the stakes of the colonial market in exchange: “In 1783 a partnership of Kingston factors complained to John & Thomas Hodgson of Liverpool that bills could not be procured under a premium of 2.5 percent, and sometimes 5 percent had to be paid. Thus, whereas £100 sterling in Jamaica was usually equal to £140 in local currency, the partners now paid £142 10 shillings, or £145, for the same sterling value” (Morgan, 726). The important point here is that the factors needed to purchase the bills used to pay the slaving captains from the planters in a competitive market, and what the planters were ultimately selling were the proceeds of their planting. All the money was in England, and it stayed in England: what was ultimately happening was that the purchase of the slaves had to be paid for, in England, by the sale, in England, of the primary goods that the slaves produced.
Thus, what the trans-Atlantic market in bills of exchange was ultimately financing was a capital market. Previously, when we considered the role of discounted “inland” bills in financing the flow of intermediate goods through the value-added hierarchy, we were considering simply the financing of “circulating capital,” or the goods required as inputs in the day-to-day production process, against the output of finished goods. Here, however, we are considering the financing of “fixed capital” — enslaved people as capital goods — against their output of raw materials. As capital assets, enslaved people have a “price-earnings” or P/E ratio, representing the amount of time that it would take for the initial investment in the slave asset to pay off. The greater the amount of investment capital flooding into the slave trade, and the more speculative the market in slaves became, the more the P/E ratio in slave assets might rise. As the ratio grew, there might exist a growing imbalance between the price of slaves on the dock in the West Indies and the amount of balances from the proceeds of slave-produced goods in England held by the planters available to finance their purchase. This state of affairs would result in precisely the situation complained about by the Kingston factors: a seller’s market in bills in the West Indies, requiring the factors to pay a premium to acquire these instruments in order to pay for the receipt of slaves at wholesale.
Thus, a proper understanding of the technicalities of the exchange by bills can illuminate a more theoretically important question: the capitalization and financialization of enslaved human beings as assets in the modern Atlantic system. Further exploration of this topic is beyond the scope of this essay, though I trust that the reader will immediately grasp its importance. Suffice to say, for now, that to the extent that “capitalism” is a meaningful term, it surely has something to do with the financing of investments in capital goods against the output of final goods, and thus with the valuation of capital assets in the present in terms of the future production that they make possible. Since enslaved human beings are the most mobile form of capital asset, it was in the Atlantic slave trade that medieval forms of financial instrument originally developed to finance international commerce began to come into relation with the financing of investments into capital assets. For this reason, those who insist on trying to locate an “origin of capitalism” would do worse than to find it in the West Indies.
Neal, Larry. The Rise of Financial Capitalism: International Capital Markets in the Age of Reason. Studies in Monetary and Financial History. Cambridge ; New York: Cambridge University Press, 1990.
Itoh and Lapavitsas get this right, see Itoh, Makoto, and Costas Lapavitsas. Political Economy of Money and Finance. London: Palgrave Macmillan UK, 1999.
It is possible, then, for interest to be a disguised form of usury, just in case there exists a tacit agreement beforehand between creditor and debtor that the debtor will fail to perform payment at maturity and thus be liable for a charge of interest.
Treynor, Jack L. “The Economics of the Dealer Function.” Financial Analysts Journal 43, no. 6 (1987): 27–34.
Morgan, Kenneth. “Remittance Procedures in the Eighteenth-Century British Slave Trade.” Business History Review 79, no. 4 (2005): 715–49.
Additionally, since enslaved people are a high value-to-freight cargo, it is also unlikely that the captain could fit enough other goods into his hold to make up the monetary value of the cargo being sold in the West Indies.