The turmoil of the Later Middle Ages (c.1300-1450) continued and accelerated the changes that started with the rise of towns and kings in the High Middle Ages (c.1100-1300). Although these were certainly difficult times to live through, they also paved the way for the modern institutions, movements, and values that would emerge after 1450: capitalism with its new attitudes toward money and profit, the Renaissance with its new attitudes toward the secular world and Man's place in it, the nation state with its relatively centralized bureaucracy and army, and the age of exploration with the new perspective it gave on Europe's place in the world. New technological innovations such as the printing press, gunpowder, and better ships and navigation would also generate significant changes.
The turmoil of the Later Middle Ages did not affect everyone equally. Nobles, in particular, saw a decline in their position as a class. The longbow, gunpowder, and massed formations of infantry pikemen effectively challenged the armored knight's supremacy on the battlefield. Even his place in the castle grew ever more dangerous as new and more destructive cannons were constantly being developed. Economically, the Later Middle Ages had seen labor shortages that led to higher prices. Inflation cut increasingly into the noble's wealth since it was based on land with a more static value. By 1450, almost all the peasants in Western Europe had been able to buy freedom from their lords, paying them fixed rents instead of labor. Even those rents failed to help the nobles much since inflation reduced their value and nobles often had little skill or desire to spend within their means.
The nobles' decline meant other social classes could rise in power and status. Peasants benefited because they had bought their freedom and many even owned their land. The greater incentive provided by working for themselves rather than their lords led to greater agricultural production and the revival of Europe's population. The middle class benefited by making money from the nobles, either through loans with interest or selling them goods for a profit. However wealthy nobles may have been, it seemed that a lot of their money was ending up in the hands of middle class merchants. The middle class was also assuming a larger role in the governments of the emerging national monarchies in Western Europe. Kings also benefited since the nobles had been the main obstacles to building strong nation-states. The alliance of kings and middle class meant that the kings were the only ones with the power and wealth to afford the new gunpowder technology that was becoming a necessary part of any respectable army.
In spite of this, some powerful and influential nobles remained. Others were forced to seek employment in the king's army or at his court as courtiers, basically idle hangers on whose job was to make the king's court look impressive. Many others lost their noble status by having to support themselves through such ignoble pursuits as agriculture and commerce. Still, the nobles were considered the class to belong to. As a result, we see wealthy members of the middle class buying titles of nobility from the king (who always needed cash), giving up their businesses, and settling down on their landed estates just like other nobles. In this way, the noble class was constantly replenished by new blood, although the importance of the nobles kept on its path of gradual decline. The changes sweeping through European society were making it harder and harder to find a place for the nobles.
By 1500, we see the peasants in Western Europe free and often in possession of their own land. The middle class' status was getting steadily higher, both through their money and positions in the king's bureaucracy. And the kings were tightening their grip on their realms through their bureaucracies and armies.
First of all, the dramatic population growth of the late 1400's meant that towns and trade could also rapidly recover and surpass their previous prosperity. In 1450, the wealthiest banking family in Europe was that of the Medici of Florence, whose fortune consisted of 90,000 florins. By the 1500's, another banking family, the Fuggers of Augsburg in Germany, had taken over first place with nearly one million florins to their credit, over ten times that of the Medici half a century before. What this suggests is that the amount of trade and money in circulation had increased a great deal.
The second effect was that there were new consumer markets, but with a very different distribution of wealth from before. In the High Middle Ages, nobles had provided merchants with much of their market since they controlled so much of Europe's wealth at that time. By 1450, this had changed. Most nobles had lost money and status and could not afford the fine woolens and other goods made by the guilds. Instead there were common laborers and peasants, each with a modest amount of money to spend. A lot of money was there. It was just spread out more widely.
This change in the consumer market from a few rich nobles to a large number of people each with modest amounts of cash led to a change in production techniques as well. Up to this point, guilds had controlled the production and selling of manufactured goods, while nobles could afford the high quality and prices that the guilds maintained. The new type of consumer emerging by 1500 could not afford them. In response to this, some wealthy businessmen went outside the town walls and the jurisdiction of the guilds to the various peasant cottages in the countryside. Here the peasants would produce lower quality woolens than the guilds produced. The businessmen would pay them lower prices for those woolens and turn around and undersell their guild competitors. In this way, older medieval cities and guilds, such as in Flanders, went into decline, while other centers of production took their places. This also led to the growing concentration of wealth in the hands of a few rich businessmen instead of being spread out among the guilds. Thus by 1500, the consumer market was more spread out than before, while the means of production and investment were concentrated in fewer hands.
The third effect of Europe's reviving economy was that its expanding internal markets prompted Spanish and Portuguese explorers to search for new trade routes to the sources of spices in the Far East. Besides opening up whole new continents for discovery and exploration, this also vastly expanded the volume of Europe's trade.
In order to handle this higher volume of trade, new techniques of handling money became prevalent about this time. The Italian city-states especially pioneered these new methods. The prosperity that these new business techniques brought Italy largely explains why Italy would lead the rest of Europe in the Renaissance. Very briefly, these techniques were:
Joint stock companies. These allowed people with small amounts of cash to take part in business enterprises such as merchant expeditions. Their importance was that, instead of hoarding their money, people put it into circulation in Europe's economy, allowing it to grow even more.
Insurance companies. These reduced the risk of losing all of one's investment in a business venture. The result was much like that of joint stock companies, in that it encouraged people to invest, rather than hoard, their money, which stimulated further growth in Europe's economy.
Deposit banks and credit. These gave bankers more money to invest in business ventures since they attracted investors with their promise of guaranteed interest from the deposits. Banking houses also opened branches and extended a system of credit across Western Europe. Credit allowed a businessman to use more money than he actually had to embark on some venture, paying his creditor back with interest when he made his profit. Europe's economy grew much more quickly this way than if it had been limited by the amount of cash on hand at any particular time. Banking and credit also made the transfer of funds across Europe much safer. For example, with a strictly cash economy, someone transferring funds from Florence to London ran the risk of being ambushed by brigands and losing his money. With credit, the same merchant could send an agent to London with a note saying he was worth so much money guaranteed by the bank back in Florence. The agent might get that money in the form of church taxes bound for Italy. He could use that cash in England, and then send a credit note back to Florence worth the amount he borrowed in Church taxes. If brigands ambushed an agent either way, all they got was a credit note that they could not spend. Meanwhile, the Florentine banker got hold of all the funds he needed in England, and the Church in Italy safely collected its taxes from England.
There were dangers to this system, especially debtors not repaying their creditors. Kings were especially bad risks in this respect. For example, in the 1340's, Edward III of England failed to repay the Bardi and Peruzzi firms of Florence. This caused their bankruptcies, which sent ripples throughout Western Europe's economy since so much of it was tied up with these two banking houses.
These new business techniques combined to create a feedback cycle that accelerated the growth of Europe's economy. More money was invested in new business ventures. This increased trade, which stimulated more production of goods. That, in turn, created more jobs for people, who had more money to spend, which was safer because of the new business techniques, and so on.
Overall, the system worked quite well, providing money for the expansion of Europe's economy and the growth of its monarchies. Two other important factors should be mentioned. One is the dramatic improvement in mining techniques in Europe at this time. Germany in particular saw a fivefold increase in mining production between 1400 and the early 1500's, which put much more silver into circulation. Secondly, the adoption of Arabic numerals improved accounting techniques so trade and business could run more efficiently. All this increased economic activity and prosperity transformed European values and attitudes toward money and helped create a new economic system called capitalism.
Private ownership of the means of production. This was largely a break from the Middle Ages when guilds controlled the means of production. We have seen how wealthy businessmen started to break the guilds' monopoly by having peasants produce textiles in the countryside. This process continued and accelerated after 1500. Modern communism theoretically has the means of production owned by the workers, represented by the government, which in some ways seems closer to medieval guilds than its main rival, capitalism.
The law of supply and demand determines prices. Once again, this is a break from the guilds which kept prices artificially fixed no matter how plentiful or scarce its goods were. Communist governments also control prices in a similar way.
There is a sharp distinction and often little contact between the workers and the capitalist who owns the means of production. Such a distinction existed to a much smaller degree between guild masters and their laborers, and this became a serious problem in the later Middle Ages. Such a gap between capitalists and their workers would widen considerably and become especially bad in the early Industrial Revolution of the 1800's.
The profit motive. Although medieval guilds and merchants made profits, those profits were largely restricted by the Church's ban against charging more than a "fair price" for goods and services. The emergence of the profit motive by 1500 especially shows the changing attitudes and values in European civilization.
Capitalism helped lay the foundations for the rise of national monarchies in Europe by providing them with the capital to build up strong professional armies and bureaucracies. The states that best adapted to capitalism, in particular the Dutch Republic in the 1600's and England in the 1700's, would emerge as the economic and political powerhouses of Europe and eventually establish dominance of the world in later centuries. European prosperity in the later 1400's also made patronage of the arts possible and helped create one of the greatest cultural movements in history: the Renaissance.