(An excerpt from my upcoming book)
In any conventional history of capitalism, we are taught that the Dutch were one of earliest innovators in financial markets (before the baton was passed to the Brits, then the Americans). Indeed, they appear to have invented securitisation in the 1600s. And if we wanted to look even further back, we are told that the 12th century financiers in the Italian cities of Genoa and Venice were the earliest capitalists.
But what is less well known is that it was the Italian interaction with the Muslim world that likely transferred to Europe many of these financial techniques. We now know much of this from the ancient Ben Ezra synagogue in Cairo.Its storeroom or genizah was discovered in the late 1800s to contain manuscripts covering one thousand years from 870 CEs .(The picture above shows the scholar Solomon Schechter working through the manuscripts in Cambridge University Library in 1898) . The treasure trove later was called the “Cairo Geniza” and has been studied much over the last fifty years. Eventually, it was found to contain 300,000 fragments. They give a detailed picture of the economic and cultural life of the North African and Eastern Mediterranean regions, especially during the 10th to 13th centuries.
With this documentary evidence, and earlier Islamic sources, it has been found that merchant-capitalist techniques can be traced even further back to the late 8th century. This was the era of Islamic empires that relied heavily on international trade.
In terms of the financial specifics, the 8th century influential Islamic legal jurist, al-Shāfiaī, legitimised capitalism by defining the function of business partnerships as the “expansion of capital”. During the same period, another legal scholar, Shaybani, laid out the types of commercial contracts that could be employed in the chapter on partnerships in his major work “Kitab Al-Asl”. Amongst the various types of agreements, two stood out:
First, a type of partnership called a “mufawada”. This in essence would be understand today as a corporate structure with partners who would be jointly and severally liable for the company. This meant that all partners would be liable for whatever action the company engaged in. It was characterised as “in reality two persons, but from the standpoint of commerce, they are like a single person”.The liability would also be unlimited.
Second, the “commenda” contract which was widely used by the Italians traces its origins to this Islamic period (and even earlier, though in different forms). Again, in 8th century this was defined as an investor or a group of investors entrusted their capital to an agent-manager, who would conduct business with it. He would then take a share of the profit, and return the principal and remaining profit to the investors. The 11th century legal scholar, al-Sarakhsī (d. 483/1090), writes, ‘the investor’s aim in handing over the capital to him [the agent] is the achievement of profit’. The agent would have full authority to delegate to anyone he deemed fit. This saw commercial agreements move quickly outside of family units. In today’s world, this would resemble a venture capital fund.
Importantly, in both form of agreements, the partners or investors could use credit, rather than actual assets, to fund the initiatives. Sarakhsi wrote that “selling in credit is an absolute feature of trade”, and:
“We hold that selling for credit is part of the practice of merchants and this it is the most conducive means of achievement of the investors goal which is profit. And in most cases, profit can only be achieved by selling for credit and not selling for cash…”
This allowed getting around usury. Moreover, the transfer of debt and letter of credits were commonly. Indeed, in the case of debt, investors could empower their fund manager to collect their owed debt and use it seed their fund.
The Cairo Geniza also showed that such transactions were commonly used by all communities at the time. In fact, the Jewish communities at the time preferred the Islamic laws, “qirad al-goyim” (according to law of gentile), more used than less flexible Talmudic ‘isqa. Similarly it was widely used by the Christians living under Muslims .
Furthermore, the vibrant capitalistic backdrop spurred the ninth-century Persian mathematician, al-Khwarzimi to make major advances in mathematics. Commercial problems that required mathematical techniques to solve them included calculating rates of return on investments and the division of inheritances. One such advance was the invention of algebra, another was his introduction of Indian numbers into the Euro-Asian trade. These techniques greatly expanded the use of agreements for merchant-capitalist purposes. Interestingly, it should be noted that the word “algorithm” comes from the Latinised version of his name “Algoritmi”.
Other notable financial innovations of this era were “funduqs” – specialized large-scale commercial markets that became virtual stock exchanges, the invention of the cheque,and in early 11th century evidence of the first cashless shopping district in Basrah, where bank-based cheques were used.
While I’ve shown it was the interaction of the Muslim empires (and their merchants of all faiths) with Europe that transferred many capitalist techniques to the Italian states. No doubt, a wider study would find Indian or Chinese civilisations with similar advances, perhaps even pre-dating the ones seen in the Muslim empires. The point being that people in all cultures across time have been incredibly inventive in finding ways to make money. The more we learn about world history, the more we can see our similarities as well as our differences.