Monetary Analysis, Financial Innovation and Institutions before the Industrial Revolution: a Paradigm Case

We hope nevertheless that everyone will learn for the future the lesson that the financial economy and the real economy should never be split to a degree that the former could be perceived by the public as merely a «paper economy» or worse as a «waste paper economy». … These effects call for the role of Institutions which must never be neglected, in order to have well-functioning markets. (Quadrio Curzio, 2008, p. 370) 1. Introduction The assumption that there is a necessary connection between the real and the monetary/financial sides of the economy is a central theme of this volume. These two sides cannot be divorced, because their coordination and harmonization is a necessary condition for a well-functioning economic system. A ‘paper economy’, and the monetary/financial institutions that support it, can facilitate economic transactions because liquidity is a necessary ingredient of economic activity in a monetary economy. Nevertheless, when the virtuous circle between the monetary/financial institutions and the real economy is disrupted, the stage is set for economic disorder, with consequences that may go beyond the strictly economic realm and impact on the political and social spheres of human activity. The risks of such disruptions are so great that appropriate institutions should be devised in order to prevent their occurrence, thereby promoting well-functioning markets and healthy economic relations. The integration of the monetary sector into the analytical framework of structural analysis has a double rationale. Firstly, structural analysis includes, and indeed requires, an understanding of how different sectors interact in shaping the evolution of the whole economy. Now, the financial/monetary sector has been an integral, important part of the economy since the Middle Ages. Consequently, this analytical framework would be incomplete without the analysis of the interactions between the real and the monetary/financial sectors of economic systems. In particular, one aspect of structural economic dynamics concerns technical progress.