False Growth in the Credit-Based Economy:
A Historical Sketch

Aisha Bewley

[This was given as part of a seminar on Usury in 1987. It was included in Discredit: Interest-Debt, published by Abdur- Razzaq Lubis (lubisksn@tm.net.my) for the PAID Network, Penang, Malaysia]

Modern economists are obsessed with the idea of "growth" - credit growth, money growth, economic growth - the list goes on. But the questions we must ask are: Is this growth sustainable? Is the whole concept of economic growth based on credit valid? Has it ever worked in the past?

What I intend to do is to illustrate an historical cycle which occurred in the major financial centres which were based on, or extensively relied on, "paper" money. In other words, they relies on credit.

I will concentrate on certain European economies and focus on the pattern running from Genoa to Amsterdam to London to New York. To illustrate two different types of economy which fall outside this pattern, I will refer to Venice of the fifteenth century and the Ottoman Empire prior to 1800 to illustrate prosperity without the extensive use of credit.

This talk will concentrate on "currency", for as Lord Keynes pointed out: "There is no subtler or surer means of overturning the existing basis of society than to debauch the currency." So the nature of currency is crucial.

Now, before leaping off into history, I will first touch on money and its function, and explain some of the transactions to which we will refer in the course of this essay.


The function of money is to separate buying from selling and thus enable people to trade without needing to have recourse to direct barter - like trading goats for wheat and the like. Money is therefore a medium of exchange and, by extension, it is also a unit of account so people can keep track of what they have more easily.

Many things have been used as money in the course of history - salt, tobacco, pepper, cowry shells, etc., but gold and silver and have been recognised and accepted as money for the past 2000 years. Gold and silver form a currency which owes its value to an inherent desirability. Both are worth something in themselves as commodities.

There are two types of paper 'currency':

1. What can be termed as 'fiduciary' money or promissory money, which bears the promise that it can be exchanged for gold or silver, So, in principle, it represents something of value.
2. Fiat money, which is issued by governments or banks and which is intrinsically worthless - bits of paper with no actual value in themselves other than the illusion of value. This is the form of currency in use today.

Since usury was absolutely forbidden by the Church and those who were known to practise it forbidden communion in the Church and sometimes even Christian burial, various credit devices were contrived to get around the prohibition and also to circumvent the need to move large sums of cash around. These devices were employed by the money dealers and lenders of the time. These transactions also enabled them to make themselves a handsome profit. Debt at that time was substantial. For example, in 1642, the total income of the 121 English peers was about £730,000 - but their debts were £1,500,000. People were desperate to get hold of money by any means, and money lenders equally eager to make a profit from people's needs.


The major unit of credit they devised was the bill of exchange.

The bill of exchange was a binding promise to pay a specific person a certain sum at some future but proximate date in another town, and hence a change into another currency. This in itself involved a loan, for even if a bill was payable 'on sight', it still took time to be carried from one place to another before it could be paid. It was also agreed that for large sums the person required to pay should have time to raise that sum. This delay, known as 'usance', might be one, two or three months from the day the bill was presented - so the merchant had a credit advance of one to three months. Fair enough, but the lenders had fixed rates of usance, or interest as we would call it today, and also received additional profit on the loan by playing the exchange market. Some merchants would even send bills to themselves to gain credit, bills secured by absolutely no cash at all!

This transaction usually involved four people. Merchant A (call him Antonio of Genoa) owes money to Merchant B in Antwerp (call him Hans). Antonio needs to pay money to Hans, but does not know anyone in Antwerp who can pay Hands. So Antonio goes to a local banker, say the Casa di San Giorgio, which has an account with people in Antwerp, the Welsers. Antonio pays his money to the Casa which gives him a bill which he then sends to the Welsers. The Welsers then pay out the sum to Hans. Antonio has to pay the Casa more than he owed Hans to cover their interest. The difference between the two sums amounts to, say, a certain extra number of florins which is concealed interest.

These bills were also subject to discounting. Hans has this bill of exchange, but he does not actually have the money because the Welsers have a month in which to pay it to him. He goes to a discounter and says, "I have a bill of exchange for 300 florins at one month usance." The discounter buys it from him for 270 florins, and so he has paid an interest of 10% a month to obtain this sum of money. It was clearly usury and definitely detested by the moralists of the time who saw through it.

From the time of the Reformation, usury became far easier in Protestant countries, and loans were effected by a simple promissory note promising to repay a certain sum at a certain date. These promissory notes could be assigned to creditors to pay another debt. Hans has a promissory note for 20 florins from Wilhelm. He owes Anton 18 florins, so he gives him the note and signs it over to him. So it becomes a currency. Bills of exchange were also transferred. We find goldsmiths and silversmiths handing out credit notes based on the metal deposited with them and which then were passed from hand to hand as currency.

This is the origin of paper currency, used originally to conceal the usury involved. Now we can move to our historical illustrations:


Genoa moved discreetly to the forefront of finance in the 1550's and the age of the Genoese lasted until 1627. I am missing out Antwerp, a hotbed of usury under the Fuggers and Welsers, because the use of paper really came into prominence in Genoa. The Fuggers complained that doing business with the Genoese meant playing with pieces of paper (mit papier) while they operated with real money (Baargeld). Genoa had to focus on paper in order to avoid the Canon laws on usury.

The focus of activity in Genoa centred on a group of banker-financiers (your early multi-nationals) who formed a joint bank, the Casa di San Giorgio, in 1408. By the 1530's the total debt handled by the Casa was 40 million lire (8 million ducats) which was divided into paper credit notes each wore 100 lire (20 ducats). In 1557, the Genoese took on the lucrative job of managing and moving Charles V's money for him. They lent him money at what they said was 10% + expenses, but 30% according to the royal secretaries.

Profits were enormous - and, more importantly, their credit enabled them to control the silver bullion arriving from America. So they went one step further and then used the silver bullion to buy and control gold. As bills of exchange had to be paid in gold, the Genoese were given considerable power. When the King tried to sack them in 1575, they blocked the circulation of gold, the troops mutinied (and sacked Antwerp) and the King gave in. The whole system of commerce functioned through these bills of exchange, which they ultimately controlled.

Eventually it became too burdensome for them - they could not keep up with the constant demands of Spain and after the Spanish bankruptcy of 1627 they more or less withdrew. It was getting out of hand as they were lending more capital than they had at a low return and they had the good sense to recognise that. So Genoa was the first to develop the paper system of bills as a mechanism to monopolise credit and to make usury not so apparent. They bequeathed this paper system to the rest of Europe.


Amsterdam, the centre of seventeenth century financial activity, had been growing steadily all the time, gradually displacing Genoa. It was aided by the flocks of refugees who came there, particularly the Sephardic Jews who were the masters of currency and stock exchange at that time.

Initially, Amsterdam began as a commodity centre, the usual starting point for most financial centres. It collected, stored, sold and re-sold all manner of goods and had a virtual monopoly on transport. Accounts were settled by transfers using fictional 'bank money' with interest of 5%, so the Dutch rarely had recourse to coin. The banks' book-keepers would deal with 10 or 12 million florins a day on paper.

The credit market was handled by firms and merchants. But gradually, as was the case with Genoa, the commodity trade declined and they became more and more a credit market for lenders and borrowers than a commodity market for buyers and sellers. The goods bypassed Amsterdam and the Dutch became 'the bankers of Europe'.

The use of bills of exchange grew and they were used in lieu of cash. They were preferred because they bore interest (through discounting and underwriting).

The flood of paper grew - to 4, 5, 10 or 15 times the amount of real money in circulation. Sometimes it consisted of chains of unsecured bills (wisselruiterij) - based on promises without any collateral at all. All the paper converged on Amsterdam, leaving it only to return to it again. So the basic mechanism of the commercial system was provided by the criss-cross movements of bills of exchange.

There was always a great deal of specie cash under it all, just as there had been in Genoa. Vast sums of gold and silver flowed into Amsterdam but it was the reputation of Amsterdam that allowed risky deals of chains of paper, secured only by the prosperous reputation of the Dutch economy.

The power of the money men of Amsterdam was such that they could put 200 million florins in paper money into circulation at the drop of a hat.

This very prosperity, based on paper, led to the usual embarrassing surplus so that Amsterdam had too much credit to invest. There weren't enough people to borrow this created credit, so the Dutch turned to modern states - notoriously good at consuming money, and bad at repaying it. Loans were made wildly - to the Hapsburg Emperor, the Elector of Saxony, the Elector of Bavaria, the King of Denmark, the King of Sweden, Catherine II of Russia, the King of France, the city of Hamburg (their rivals!) and the American rebels. Perhaps they had 'loan quotas'!

The over supply of money in Amsterdam is shown by the fact that it was being loaned at only 3% or 2% (exactly as happened in Genoa in 1600). There was too much credit on paper available.

To get an idea of the state that Dutch finances reached (or sank to), let us examine the figures for 1782. Total capital amounted to a thousand million florins. 900 million was invested in loans, and only 50 million or 5.5% of the total was in gold or silver. The rest was paper. Some people were living very dangerously indeed.

The inevitable crises arose, beginning in the 1760's. The first crisis followed the Seven Years' War (1756-63), which was a very prosperous time for Holland, as it had been neutral. This surge of prosperity exacerbated the situation, resulting in free-for-all extensions of bills of exchange and chains of unsecured paper. Credit piled up in a paper mountain fifteen times that of cash. Discounters had to stop discounting and there was a currency storage. Bankruptcies resulted - one firm went under with debts of 6 million florins, another with debts of 1,200,000 florins. Bank money plummeted. The stock market came to a standstill.

The situation was only saved by a cash injection. Some people had installed factories for refining bad money issued by Frederick II of Prussia. Local merchants arranged to collect the coins and send them to merchants in Amsterdam via family connections. They, in turn, drew bills of exchange on the metal, enabling the big merchants to survive through an injection of real money.

There was yet another crisis in 1773 when and English firm went bankrupt with debts of 5 million florins. The same chain of events happened - the Stock Market stopped - other firms went down. Those who had real money or goods survived. Those up to their necks in nothing but paper went down. But really, by this time people were looking more and more towards England.

What had happened in Genoa had happened in Amsterdam. The creation of credit, unsupported by real money, generated enormous growth. Money had been created out of thin air, credit grew to unmanageable proportions, bad loans were made, and bankruptcies resulted. The situation proved to be intrinsically unstable.

Venice and Ottoman Turkey

When discussing currency and paper, it is, of course, impossible to avoid mentioning the notorious South Sea Bubble and the Great Crash that followed it. But first, I would like to cross over to my two other examples, Venice and Ottoman Turkey. I think that we have a pretty good picture of the financial mechanisms of the Genoa-Amsterdam system, and if we move over in more or the less the same time zone, it makes for a good comparison.

Early Venice was a model which was based on trade, and counters the argument that without extensive credit (manufactured out of nothing), there can be no prosperity nor a flourishing economy, I will concentrate on the 15th century, the real peak of Venetian trade.

Venice occupied a very advantageous geographical position - it controlled the Adriatic and the trade with Syria and Egypt. It had excellent contacts with Germany and Central Europe to whom it sold cotton, pepper and spice and who provided it with silver coins to use for purchases in the Levant. There was also a Venice - Bruges - London route.

It expanded into an Empire, occupying towns like Padua and Verona - and became very wealthy indeed. In 1423, the receipts of the Signoria alone, the city of Venice, amounted to 750,000 gold ducats. This is equivalent to a per capita income between 50 and 100 ducats which is very high indeed for that time. In England the yearly income for the lord of a good-sized manor was about 12 ducats.

This was all based on trade and a state of peace (unlike the financiers who thrive on war to create debt). Return on foreign trade at the time was 40% - all based on major commodities - pepper, spices, Syrian cotton, grain, wine and salt.

Mind you, trade was only free for Venetians. Following the pattern they had experienced trading in the Middle East, they confined German merchants to a special residence. Germans had to deposit their goods there and sell them and buy Venetian goods under strict supervision. Venetian merchants were forbidden to buy and sell directly in Germany, so the Germans had to come to Venice with their goods, including silver, essential for trading with the Muslim lands.

The state also undertook to build large merchant ships for charter. There was an annual auction and the winner collected charters from other merchants and charged them for the freight, based on the amount of goods. These 'pools' were open to any Venetian merchant, but the authorities were quick to disband any cartel which seemed to be forming a monopoly.

Venice was much more conservative than other Italian states and, as you can see, a central feature of this was the strong control of the government, which itself was composed of merchants.

As for finances, usury was not the mainstream of economic life in Venice, unlike Genoa.

The primary commercial instrument was the commercial loan, the colleganza, and 90% of the time this involved a partnership deal. A merchant would provide all the capital and then get his capital back plus 3/4 of the profits, or he would put up 3/4 of the capital and get back the capital plus 50% of the profits.

The entire populace supplied credit for the voyages and the whole system was self-contained and self-sustained. Merchants worked on a deal-to-deal basis. Accounts had to be settled within 30 days of a ship's return. The bill of exchange was never more than that - limited to the duration of its journey. Venice was content with its own ways and not interested in financing others. Commodity trade was the life blood of Venice, not finance.

When Venice declined in the sixteenth century, the major factor was external - the fall of Constantinople to the Turks. Venetians and Turks fought each other off and on for 250 years, and prosperity drained away.

This brings us to the Ottoman Empire, which was a strong and vigorous state in its heyday. It was full of large, populous trading cities. The grass roots level of the economy was what is described as the 'bazaar economy', that is, a market economy centred around the cities and regional fairs where exchange followed traditional rules and was characterised by good faith.

In 1550 (when Genoa was on the rise), everything in Turkey was exchanged for cash - no papers, no loan-sheets or ledgers - and no credit transactions involving interest. Even under the influence of western merchants, this old way was slow to change. We have the occasional bill of exchange (suftaja), but its function was just that. A western merchant could transfer his excess balance from Constantinople to his agent in Aleppo without interest. There were no banks or speculative transactions. What we do find are partnerships, Venetian style arrangements, and credit without interest.

What we notice about commercial life there was the low prices of everything compared to western Europe. The further away you get from financial centres, the lower the prices. There were not a lot of actual coins in circulation, but that did not affect normal commercial life. The backbone of Turkish independence lay in the caravans which were strictly controlled by the state, thereby giving her control over her trade and resources. Most of her seas were protected as well. Furthermore, Ottoman merchants thwarted penetration by foreign merchants who were allocated their own quarters in the cities and kept under surveillance.

The decline in the Turkish Empire started around 1800 in the Balkans due to European influence. The advance of the European system proved destructive, the state lost authority, foreign goods flooded the market, thereby destroying native industry, and the economy became sluggish. War also put a strain on the economy - especially the constant conflict with Russia.

So we see from these two instances that prosperity is possible without usury. A paper-based system is not the only alternative.

South Sea Bubble

But to return to our theme of usurious growth, let us look at the notorious South Sea Bubble, which ensnared many people into the use of paper. The South Sea Bubble is, in effect, an accurate although dramatic manifestation of the cycle of reliance on paper money - sixty years of artificial growth compressed into six months.

Following the various wars with Holland, England had built up a rather large debt. In 1694, the Bank of England was established to help fund William of Orange in fighting France, and was described by its founder, William Paterson, as designed to "have the benefit of the interest of all money which it creates out of nothing." This is a clear articulation of the unreality of paper money.

Then something had to be done about the debts generated by the government through the Bank. In 1711, all holders of government short-term obligations (some 9 million pounds) became shareholders, whether they liked it or not, in the 'South Sea Company'. This was designed to amalgamate England's floating debt into a single, unified sum like the advertisement you see in the press to take one big loan to pay off all your debts. However, in this case, rather than being a loan, it was shares in a company. So while England's credit was good, its debts were enormous.

Short-term and long-term commitments (some secured on tax revenues for the next 80 years) amounted to £40 million. All were at 6% interest, so the government had to find over £ 2,500,000 million every year to pay its creditors, which was a vast sum in those days. The government was therefore on the look-out for ways of dealing with this debt.

They looked to France which was also deeply in debt and saw something quite interesting. A Scot, John Law, had been given free rein to establish a system which included the formation of an overseas trading company, popularly known as the Mississippi Company. This was infamously known as Law's Experiment. He accepted government securities as payment for shares in the company. In other words, people exchanged the debts the government owed them for shares in the company. Because the company was backed by the government, the value of the shares increased dramatically - the price of a 500 livre share went up to 18,000 livres.

When the English government saw this, it thought it would be a jolly good way of reducing its debt, and so it decided to use the South Sea Company in the same way as Law had used the Mississippi Company. Government creditors were able to exchange their bonds for shares in the South Sea Company - for a sum - and get the dividends, if there were any. Within a year, 80% if these debts were converted into shares. The price went from 120 to 950 in six months.

Then things got out of hand. When the French Mississippi Company was only able to bring in a 2% dividend, people's confidence in the South Sea Company plummeted. People sold and sold, and the Great Crash began. South Sea stock went from 775 points to 170 in six weeks. Anxiety led people to hold on to hard cash and coins disappeared from circulation and could only be borrowed at 5% per month. In Ireland, commerce was practically reduced to direct barter.

The government got rid of some of its debt and got more people used to dealing in paper, people who would have had absolutely nothing to do with paper before this time. It was somewhat like convincing people to buy shares in British Telecom or BP in order to make them more at ease with a new type of financial transaction. More people began to think about making money from bits of paper. What we see here is a miniature of the whole bubble credit cycle which shows that unreal growth is entirely dependent on people's faith in it, and once belief in it goes, there is an inevitable collapse.


Eventually, in 1816, England ended up on the gold standard, but by this point England was already using paper issued by banks. Gold and silver were only lesser currencies. The war with France required the export of specie (cash) to the Continent to finance the war, so Pitt persuaded Parliament to pass the Bank Restriction Act. It laid down the compulsory exchange rate for notes and made them 'temporarily' non-convertible. This remained in force for 24 years. The bank notes - with no guarantee behind them - circulated without losing any value in relation to metal. A Frenchman living in England during the Napoleonic Wars said that he had never seen a single gold guinea the whole time he was there.

So the real guarantee for the paper was now neither gold nor silver, but the output and prosperity of Britain. And the size of the national debt was substantial - it went from £30 million in 1748 to 834 million pounds in 1815. Even so, the popular press still showed unease at the use of paper money. The common people were scathing about the whole process, especially in view of the fact that by this time it was child's play to manipulate the money market if you had the clout.

For example, when the Rothschilds were excluded from the loans floated by the Barings to held finance the war with Napoleon, they bought up the shares, beared the market, and forced the various governments and the Barings to back down and bring them in. Nathan Rothschild was able to force the Bank of England to discount his own personal bills by paralysing the Bank by redeeming cast quantities of their notes for gold - £ 210,000 in a single day. Great power was now vested in the credit brokers, and it still made people uneasy.

The Bank of England tried to control the issuing of paper money by smaller banks to ensure their own monopoly.


But on the other side of the Atlantic, the American colonies found it far easier to use promissory notes as money and Benjamin Franklin (who owned the press which printed the money) was a great advocate of this idea.

In the middle of the eighteenth century, Parliament forbade the colonies to issue paper money and this was a cause of great resentment in America. Masses of notes called 'Continentals' were printed during the Revolution and soon they worth nothing.

The expression, "Not worth a Continental" because famous at this time, meaning something utterly worthless. But what it did demonstrate was that certain people no longer had any qualms about putting something into circulation that was worth absolutely nothing.

The history of money has its own special chapter in the United States, for the general credit trend encountered a hiccup there. There was always a certain animosity to banks and debt in certain quarters. Thomas Jefferson said that "banks are to be feared more than standing armies," and he stated that no nation had the right to contract debts not payable within the lifetime of the contractors, fixing nineteen years as the limit of validity of such debts.

There was a bitter conflict between the sound money men and those who loved to print paper to make credit boom. Andrew Jackson brought down the Bank of the United States in the 1830's by blocking the renewal of its charter, seeking a return to gold and silver and sound money. There was a determined shift away from paper towards gold and silver on the part of the people. This is the only instance where there was such a reversal of the general trend and is worth looking into.

Meanwhile in England, the shift from commerce to financial income was well under way. In 1870, Britain had a third of world trade; by 1914, it only had a seventh. Overseas investments doubled in order to use up the credit which was too massive to be used up at home. The familiar pattern was under way.

World War I basically finished off Britain, leaving it with debts on which the annual interest was £ 326 million. The carrier of the credit/growth monster moved across the Atlantic. Genoa - Amsterdam - London - New York. The bubble of prosperity, overstretching itself each time while growing bigger each times, moves on to batten itself on the resources of another location.

In 1930, the USA was the world's principal creditor. Mind you, at the time, the USA was sucking Europe dry by demanding the repayment of war debts which only came to an end in December 1933 (the Hoover moratorium). Gold flowed into the USA, although by that time the USA and Great Britain had both gone off the gold standard. Beyond this point, we move into the arena of Bretton Woods and the IMF and paper currencies balanced against each other in terms of fictional money, with New York as the main financial centre.

There are several things that we notice in this cycle, First there is the growth of commodity trade. This upsurge in prosperity brings in the money men, the credit brokers who can make money from money without trading in real goods. At this point, paper and transactions in money without trading goods come into play to maximise profits for the credit broker.

This system is not in the best interests of the people, and this is recognised by the financiers themselves. There is a letter from the Rothschild Bros. to the firm of Ikleheimer, Morton and Van Der Gould (25 January 1863) in which John Sherman (future Secretary of the Treasury of the USA) is quoted as saying:

"Those few who can understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burden without complaint and perhaps without even suspecting that the system is inimical to their interests."

This system frequently generates deficit spending, which is financed by creating money and offering credit. This creates a great balloon of prosperity which far outstrips the real wealth in the system. It also generates inflation and creates a system which is intrinsically unstable. All this credit must go looking for someone who wants to borrow and this inevitably involves lending money to bad risks - insolvent governments - who default eventually because they cannot keep up with the interest payments which they must find from real resources or borrow more to pay off the interest on the credit. Does this sound familiar?

On the other hand, the systems in which we saw real prosperity and growth were based on trade in commodities, rather than on making money out of money and creating money out of nothing. In those societies, partnerships with shared risk proved to be an effective way of obtaining credit. Also we not that the governments in these systems had strong controls over what went on in their markets. They were not, by any means, laissez-faire. Indeed, the Ottomans even had inspectors who went through the markets three times a week, and severe beating were imposed on anyone found to be illegally conducting business, including public humiliation. There must be some deterrent to prevent people from yielding to the temptation of getting something for nothing.

To conclude, in the usurocratic system, to use Ezra Pound's delightful term, the bubble of prosperity, although enticing, is not real and eventually stretches itself to the point where there is nothing tangible to back it up - as we saw in Genoa, Amsterdam, and so on.

The whole system must eventually break down because it is not based on anything real and the illusory prosperity will eventually be totally unsustainable. As we have seen historically, growth based on empty credit is fragile and intrinsically unstable.

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