Pre-Modern Credit Networks and the Limits of Reputation

I. INTRODUCTIONThis Essay questions a fundamental assumption of private ordering scholarship that a good reputation is so critical to the functioning of a private system that its maintenance incentivizes members of the community to keep their promises and act honestly.1 But is this assumption necessarily true? The presumption of merchant honesty has, for example, served as a cornerstone of the myth of the medieval law merchant. Yet the historical evidence, still largely unexplored, provides abundant examples of cheating and of cheaters who nonetheless continued to do business with great success.2Pre-modern credit networks provide another test for the role of reputation. These networks, which involved the whole society in interlocking webs of credit and debt, arose from the actions of individuals who offset the lack of sufficient specie by inventing credit mechanisms to solve the problem of purchase and sale. Governments played little to no role in creating these solutions. Reputation, to some extent, did drive lending decisions, but reputation did not reliably parallel a good history of timely repayment. Default, it turns out, was not a simple binary concept in the past, and, consequently, neither were the decisions about extending credit.Although a fuller answer awaits extensive research in the archives, this Essay offers the preliminary argument that in the widespread networks of credit that acted as "the great lubricant of the Commercial Revolution,"3 reputation, or at least reputation in the sense we might understand it today, did not bear quite the weight which private ordering theory assigns to it. This appears to be due in part to a more expansive pre-modern sense of what it meant to keep a promise, in part to the role of higher-level notions of confidence and reciprocity that transcended individual debtors to encompass whole communities of lenders and borrowers, and in part to the availability of public institutions, both lay and ecclesiastical, to sanction nonpaying debtors. Although these institutions backstopped rather than replaced social confidence and reputation, their expanded use seems to have corresponded with a general increase in the society's anxiety about the solidity of the credit networks as a whole.This Essay focuses on the period from roughly 1200 to 1650. A great deal changed in the economy of Europe during these centuries, but the central place of credit remained constant. While credit existed before the 13th century, it was after around 1200 that the European economy began to grow most rapidly, as evidenced by the diversification in the denominations of specie issued in response to the needs of commerce.4 Credit similarly continued to be important after 1650,5 but by the second half of the 17th century, the spread of banks and then later of paper money began to change the role of credit in critical ways.6Part II begins by describing the historical conditions that drove the use of credit networks. Part III examines the ambivalent role of reputation in establishing and maintaining these networks. Part IV considers the additional factors that creditors considered when making lending decisions.II. THE ROLE OF CREDITPre-modern Europe was a monetized society. People of all stations of life used money to express value, whether of goods, labor, or property.7 This does not, however, mean that people always paid in the actual silver, and later gold, coins that served as legal tender. Barter, for instance, continued to play a role throughout the period under consideration in both the daily economy of consumption and the international economy of long-distance commerce. Artisans traded their products for food;8 customers paid shopkeepers in kind;9 merchants exchanged goods.10More important and more pervasive than barter, however, was credit. Extended through various mechanisms, it threaded through the economy from the large purchases of international merchants to the survival purchases of the urban poor. …