Written by Jenny Hanniver   

Wild speculation goes back to the historical beginning of investment, as far back as ancient merchant shipping out of Greece, Phoenicia, Rome, and even earlier. Merchants used money-lenders for capital, including borrowed wealth from the royal treasury, and seldom relied on individual investors.

Modern investment banking arose in the late Middle Ages, primarily in the 13th to 15th centuries. The new system allowed individuals to buy shares of the profits from the voyages of merchant ships carrying commercial cargos to and from the seaports of Venice and Genoa, the Hanseatic League's ports in North Germany, and the Hanse's subsidiaries in England, northeast France, the Low Countries, and Baltic Scandinavia. The primary ports wallowed in wealth and beautiful architecture from the 13th to the 16th century. After Columbus and Magellan, although Venice maintained a grip on the Eastern Mediterranean, most of the trade and wealth fell briefly to Spain and Portugal, then to England, Holland and France, which for centuries controlled shipping in the Atlantic and other world oceans. Drumming up numerous speculators in those days was a necessity, and speculation was dangerous, since so many ships were lost at sea. (Read "The Merchant of Venice".) It was venture capital of the most perilous kind.

This change came about because usury laws that had prevented Christians from charging interest on loans were being lifted, and because of prejudicial laws that restricted Medieval Jews into certain occupations, including banking. Jewish banks under papal protection had controlled European finance and lending in the early Middle Ages. All Jews in Europe were technically the popes' "serfs". Their banks were exploited and robbed by a few popes, but usually the papacy, for its own purposes, protected the Jewish bankers and people. Jews stayed relatively safe as long as the connection prevailed.

The Crusades unsettled everything. Not only were Europeans now aware of trading possibilities with the big wide world, but the invasions of the Levant and North Africa led to enhanced religious bigotry against Jews, who were viewed as close allies and confidants of the Muslim rulers--as in fact some were in many Muslim lands. Christian suspicion of Jews as enemies went beyond intermittent local bigotry based on misinterpretation of the New Testament and gave rise to the first widespread European pogroms. Anti-Semitism rapidly increased, forcing the highly political popes of the 13th century to begin removing their protection. Deeply prejudiced kings like Edward I of England and Philip the Fair of France were able to rob every their Jewish subjects of every penny and possession, and exile them from their countries.

But popes, kings and merchants still needed bankers. The only answer was for the popes to waive usury rules for favored Christian financiers. Christian-owned banks rose rapidly in 13th century Italy. Not only popes but kings, emperors and merchants borrowed from them--sometimes without the ability to repay. The "paper" assets of the Bardi, Peruzzi and Aldobrandini banks rose to towering wealth, then failed because vast sums borrowed by royalty to pay for the Hundred Years War were never paid. The failure of one Florentine bank, the Bardi, in the mid-14th century brought on a major Europe-wide depression, but the need for investment and loan banking was steadily increasing with the growth of mercantile cities.

These cities wanted to be free of control and regulation, papal or royal. When Florence, one of the Papal States, tried to break free of the pope, a series of bloody wars ensued, resulting in an independent Florence. Out of the Florentine banking community arose the Medici family, who--although their name means "physicians"--rose to notoriety as the preeminent 15th century Florentine bankers, Renaissance princes and corrupt popes.

By that century loans made up the larger share of a bank's activities. Parchment "bank notes" for many centuries were literally scribbled notes authorizing the loan, folded like a letter and bearing a bank's wax seal. Small value notes were pre-purchased from a bank, or more typically borrowed on the collateral of land, allowing middle-rank pilgrims and tourists to travel and buy commodities in foreign countries. Large value notes in the hands of popes, kings and others with enormous landed wealth assured that so-and-so was covered by assets of such-and-such value back home. Royalty, churchmen, merchants and wealthy travelers from the 13th century onward no longer had to carry pack-mule loads of silver or gold--always perilous--but used bank notes instead, which evolved into paper money, travelers' cheques and the plastic credit cards that plague our society. (Paper money was invented even earlier in China, out of similar needs.)

The Jews had been skillful at keeping both usury and wild speculation under control, although there was probably some of it. But the Christians were amateurs. Whatever knowledge Christian bankers had of finance had been their conduct of illegal usurious lending under-the-table. As a result they had deep ties to organized crime, and wild speculation, playing on the human gambling instinct, appeared almost as soon as the first Christian bank opened.

Financial gambling grew into outrageous insanity in the 17th century. Speculation madness is a primary subject of one of the greatest and most popular history books ever written. This was Charles Mackay's 19th Century "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds", which has been called the first Social Psychology book. Mackay's book is obtainable free on the web in its entirety.

In 1776 Adam Smith in "The Wealth of Nations" made a rational analysis of the institutional causes of insane speculation which is still readable and informative. The Tulip Bubble had occurred only decades earlier, when investment madness in hugely overpriced tulip bulbs raged through the Netherlands. Especially in that land, free-and-easy national monetary policies encouraged money to flow to the large cities. This, plus banking laxity and crony favoritism, caused bubbles and crashes in Holland and many other places for the next century. England's infamous South Sea Bubble became another maniacal investment scandal of this period.

These bubbles were very similar to those of the 1920s and the post-Reagan Yuppie era to our own time. Of course, from the 13th to the 18th centuries Europeans were still experimenting and learning. We can't blame them as much as those responsible for egging-on the recent episodes. In our era, educated so-called "economists" ought to know better.

But who, any more, reads history?