Money Markets and Exchange Rates in Preindustrial Europe

Abstract

This chapter focuses on money markets and exchange rates in preindustrial Europe. The foreign exchange market was mostly based on bills of exchange, the instrument used to transfer money, and provide credit between distant centers in preindustrial Europe. In this chapter, first I explain bill of exchange operations, money market integration, usury regulations and circumventions to hide the market interest rate, as well as the evolution of bills of exchange in history, focusing mainly on the most relevant features generalized during the first half of the seventeenth century: endorsement and the joint liability rule, which facilitated the full expansion of the foreign exchange market beyond personal networks. Then, I describe the European geography of money in the mid-eighteenth century, characterized by a very high degree of multilateralism with the triangle of Amsterdam, London, and Paris as the backbone of the European settlement system. Finally, I measure the cost of capital and relate it to liquidity. I show evidence of interest rates in the eighteenth century for Amsterdam, London, Paris, and Cadiz. While Amsterdam, London, and Paris presented low and similar

Bill Of Exchange As An Element Of Corporate Finance

“…Countries that had debts on trade transactions voluntarily paid with bills, which replaced currency and became part of the state financial system. For example, in the XVIIIth century, the European settlement system extensively used bills, and interest and exchange rates (Nogues-Marco, 2018). At the beginning of the XX century, promissory notes significantly affected the activities of credit institutions (Suzuki, 2020).…”