This image shows banking operations in the 1400s. The man at the right is depositing a bag of gold.

New Ways of Doing Business

To meet the needs of the changing economy, Europeans developed new ways of doing business. Groups of merchants joined together in partnerships. They pooled their funds to finance a large-scale venture that would have been too costly for any individual trader. This practice made capital more easily available. It also reduced the risk for any one partner because no one had to invest all his or her capital in the company.

Later, merchants developed a system of insurance to help reduce business risks. For a small fee, an underwriter insured the merchant's shipment. If the shipment was lost or destroyed, the underwriter paid the merchant most of its value. If the goods arrived safely, the merchant lost only the insurance payment.

Europeans adopted some practices from Arab and Muslim merchants with whom they traded. Among the most important were bills of exchange and letters of credit. With a bill of exchange, a merchant would deposit money with a banker in his home city. The banker would issue a bill of exchange, which the merchant could exchange for cash in a distant city. The merchant could thus travel without carrying gold coins, which were easily stolen. A letter of credit guaranteed payment of a set sum of money after the seller met certain conditions.

Changes Affect Medieval Society

These new business practices were part of a commercial revolution that transformed the medieval economy. Slowly, they also reshaped medieval society.

For example, the use of money undermined serfdom. Feudal lords needed money to buy fine goods. As a result, many peasants began selling farm products to townspeople and paying rent to their lord in cash rather than in labor. By 1300, most peasants in Western Europe were either tenant farmers, who paid rent for their land, or hired farm laborers.

In growing towns, the old social order of nobles, clergy, and peasants also changed. By 1000, a new class appeared that included merchants, traders, and artisans. They formed a middle class, standing between nobles and peasants.

Letters of credit worked like medieval credit cards. Purchases or cash withdrawals could be made without money actually changing hands.

A New Middle Class

In the growing towns and cities of medieval Europe, a new middle class emerged. The middle class, made up of merchants, artisans, and tradespeople, stood outside the old feudal order. Although they ranked between nobles and peasants, their status was not tied to the farming economy, but to business and commerce.

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