The Plague & Birth of New Economic Order

By Sergey Pakhomov, a retired and financial expert from Moscow who loves writing about economic history that is still relevant today. Here is his latest column, originally published in Russian, on the Black Death – so relevant for readers across the globe in these Covid-19 times. 

Until the end of the 14th century, constant wars, plagues and other epidemics returned in waves to exhausted European countries for two generations, reducing the population. But economic life in Western Europe continued even under these conditions. In the second half of the 14th century, the European importance of Italian Mediterranean maritime trade increased and the importance of Genoa, Florence and Venice as trading and financial centres with significant financial capital.

Despite the plague and quarantine, caravans of Venetian and Genoese ships regularly delivered goods bypassing warring countries from Levantine and Italian ports to Venice, Genoa, Antwerp, Bruges and London. Ships and merchants of the cities of the Hanseatic Union delivered goods to the Baltic coast countries. The wool and fabric processing centre, one of the main industrial activities of the time, moved along with workers from Flanders to England and then to Florence. Big trading companies were established and developed, as was a modern accounting system. 

The use of a Florentine and Venetian gold coin stabilised money circulation, international trade and prices. A dramatic rise in price of food and agricultural products was followed by a fall as death took millions of consumers away. At the same time, the price of urban crafts began to increase as deaths in manufacturing cities reduced production. This resulted in the phenomenon identified by economists as “price scissors”, which increased the economic hardship of rural populations and stimulated their productivity.

The dramatic decline in Europe’s population had far-reaching economic consequences that lasted until the beginning of the Renaissance and the New Time era. The demand for labor increased, causing a slow increase in real wages that began in the late 14th – early 15th centuries. The population of the Italian City of Pistoia in Tuscany decreased for 50 years due to hunger, wars and epidemics from 40 000 people to 14 000. Many houses and rural estates were abandoned, land prices and land rents fell almost fourfold, grain prices fell sharply, but at the same time the cost of the labor force increased. The cash income of an unskilled worker in Italy more than doubled from 1350 to 1400, and real wages increased even more. Similar processes took place everywhere in other Western European countries.

At the end of the 14th century, the amount of gold and silver metal coins in circulation began to decrease sharply in European countries. Gold and silver leaked to the East during a growing European trade deficit, many coins were literally buried into the ground and lost in the era of wars, looting and general disasters. Gold imports from North Africa (Maghreb) dramatically decreased, and many silver mines in Europe were abandoned. 

The period of demonetisation of the economy arrived at the turn of centuries. The use of silver coins almost stopped in France, between 1392 and 1402, as did Florence followed by Flanders and then London in 1408. 

“Money hunger” was a result of deep economic depression that combined with a powerful decrease of all commodity prices, land values and land rent. People moved on to barter. The absence of a coin was compensated by the stormy development of the circulation of invoices and bills. The volume of the bills in the 14th century surpassed the volume of actual trade transactions. In fact, there was an issue of fiat money. For example, in 1336-1340, the Florentine banking house Govoni registered 443 transactions with bills, of which only 70 belonged to trade deals, the other 373 were exclusively financial transactions, with 335 were purely speculative to use the difference in interest rates in Venice and Florence markets. 

Medieval bills had a term of circulation due to the delivery time of postal correspondence from one European shopping center to another. In 1400, it ranged from 20 days with Bruges, to 90 days to settle with London. Bills of exchange overcame state prohibitions on the movement of precious metals from the country to the country, effectively replacing gold and silver coins in trade. Gold and silver as bank deposits also decreased during this period.

Important changes took place in the socio-economic sphere. A new European society was born In the torment and disasters of the 14th century. There were fundamental changes in the forms of ownership and commitments. England, Western Europe and Northern Italy entered into a long process of liberalising working conditions and liberating peasants. The spiritual and economic power of the Catholic church was sharply undermined, the prerequisites for the Reformation were created. 

The widespread lack of labor allowed workers to seek improvements of both material and social working conditions. Peasant farmers began to turn gradually into renters and small land owners. In northern Italy, feudal owners themselves freed peasants offering them land for rent, not for money, but for a share of one-third or half of the harvest. Many former peasants moved to cities where they became free citizens with the support of the city authorities, turning into craftsmen and small traders. This process went on for a century after the arrival of Black Death and ended with the disappearance of serfdom as a social class in western Europe.

At the dawn of the 15th century, a stabilisation of economic life began slowly in the cities and provinces of Northern Italy, then in England and Northern Europe. After the disasters of the Centennial War, two-thirds of France’s population was reduced through hunger, epidemics and uprising. Commodity prices continued to fluctuate, but less so, free labour was much more effective than forced labour, productivity in agriculture increased, yields increased, wages increased as did living standards of the population in general. Slow population growth begun, trade and craft production started to grow again and commodity prices stabilised and then tended to decline slowly.

The rise in real wages was accompanied by a drop in interest rates as more capital was available. Interest rates continued to fall by 50% between 1370-1470 in France, the Netherlands, to a lesser extent in Northern Italy. Interest rates on commercial loans in Italy fell to 5% at the end of the century. The rates on personal loans that pawnshops fell from 43% to 20-30% by 1364. 

Wages began to compete with land rent and capital income, a slow process of growing in the living standards of peasants and urban trade folk and craftsmen. These tendencies of slow achievement of demographic and economic growth and a more balanced life began to manifest itself in the Mediterranean countries of Europe and then spread to the whole continent. The crisis of the 14th century led to a crossroads of the social and economic system of Christian Western Europe, which, contrary to the Black Death, entered the New Time.

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