How can the use of credit in anonymous exchange be supported in equilibrium? Does history offer examples of institutions that accomplish this? Financial instruments only arise when trust or enforcement are strong enough to break the one-shot character of anonymous barter and cash transactions. Before the advent of the modern territorial state with its law enforcement tools, traders could hardly hope for contract enforcement by authorities, whose reach was incomplete and at best only local. Under those circumstances, transactions that were asynchronous across space and time were ruled out, or limited to small minorities where group cohesion afforded the necessary level of enforcement, see Greif (1993).
According to conventional wisdom, such as van der Wee (1963) and North (1981), the fragmentation of jurisdictions across the many micro-territories of Continental Europe acted as an obstacle to enforceability and long prevented the rise of financial instruments. In this perspective, territorial unification in the late 13th century, which provided England and France with unified jurisdictions, enhanced contract enforceability and gave both countries a decisive advantage in the development of financial institutions.
Recent research by Greif (2002), Greif (2006) has qualified this picture. Drawing on extensive research by legal historians, Greif analyzed the medieval institution of merchants’ communal responsibility, by which merchants from a given city would be held collectively liable for each other’s debts when trading abroad. By agreements between their jurisdictions, agents would have access to each other’s city courts to settle their claims individually, and communal responsibility would serve as a means of collateralizing any debts in case of dispute. Greif shows that equilibria may exist under which agents report their claims truthfully if a case is brought to court.
In this paper, we build on this result and extend it both historically and theoretically. In the case of England studied by Greif (2002, 2006), communal responsibility was only a short-lived institution, as the transition to individual responsibility under the unified jurisdiction of a territorial state was made quickly. In continental Europe, communal responsibility survived much longer. Boerner and Ritschl (2002) looked into cases from Germany and Italy where territorial unification was absent, and found that communal responsibility was highly persistent and evolved into an elaborate system of trade treaties. In the sequel, we briefly review additional evidence to suggest that during centuries, communal responsibility was a collateralization technology supported the use of financial instruments in places where territorial integration came late.
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Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching
