What makes trading cities rich?

Question

(We're talking about a pre-industrial society here)

Obviously there are many cities in important positions for trade, either because they control an important strait (Danish Sound, Bosphorus), an Isthmus (Panama, Suez) or are in good places for sea-land transfer because the ocean reaches far inland (Venice, Genoa).

• Are these cities getting rich because they actually demand tolls (and since they are so important or convenient everybody uses them and happily pays) or because the merchants that travel through just happen to leave a lot of money in the taverns and brothels and simply boost the local economy?
• Do cities that do not require ships to actually dock there (i.e. cities that control straits like Constantinople, Helsingør / Helsingborg, Gibraltar) have any economic benefits other than collecting tolls?
• Is travel by land actually so much more expensive than by sea that even slightly less optimal cities already couldn't compete? E.g. Ravenna instead of Venice when you want to trade with Germany (only looking at the position, not the political context)?

Answer 1

The short answer is trade.

The larger answer is that the act of trading develops and requires a range of secondary and tertiary activities which are themselves economically significant.

Consider, the trader needs a place to exchange money, bed down for the night, feed his caravan and all the men who ride with him (or the ships crew if a port). Cargos need to be offloaded and stored, or taken from the warehouse and reloaded. The animals need care and feeding, or the ship will need repairs and supplies.

The sailors or caravan riders will also want some entertainment after a long trip, so places for drinking, gambling and wenching are all going to be an important part of the local economy. The lord of the region will need to supply some sort of law or authority so merchants don't get cheated (too badly) and want to return, and protection from raiders and pirates who want to steal the merchant's goods, so a military force and some sort of court system will be supplied.

All these people need to eat, and a large crafts and services industry will also be needed to provide for the needs of everyone from the farmers who supply the food to the merchants who want nice bunting to drape over their trade stalls and give them the appearance of prosperity.

So the trading city will develop a large demand for a wide variety of goods and services, and entrepreneurial people will be coming from all over to supply these demands (or skim off the top).

Answer 2

The thing that makes trading cities rich is the trading part. Think of it as a spider web. The outer area connects to other areas but together to other side resources have to go towards the center. All resources are going towards this trade center and as a result the trade center has all the resources coming to it and is able to use all of them where whereas the outer areas can't.

Furthermore, the center, the trading city, is the shortest distance between most points and as a result it's the fastest, safest, and cheapest route. If it decides to do something that blocks one side from trading with the other side, if the two sides wish to continue trading they have to travel a slower, longer, more dangerous, and as a result more expensive route.

This is why trading cities are rich and powerful.

Answer 3

It is culture, not geography, that makes a trading city powerful. A short history of Rennaisance Italy can be plenty constructive. Cities with excellent harbors and local resources like Naples or Taranto were much less of a trading city that cities built on a steep hillside (Genoa) or in a malarial swamp (Venice). Pisa was a port city that was surpassed as the leading city of Tuscany by an inaccessible city up in the hills, Florence.

The single thing that is most important for making a trading city successful is freedom from government appropriation. Where a successful trading city of the late middle ages came under the rule of a strong monarch who could confiscate merchant's money as taxes (Naples, Palermo, and Barcelona under Aragon, the Champagne fair cities, Bordeaux and Toulouse under France), that city declined while those cities ruled by weaker monarchial/episcopal rule or republics became more prominent (Venice, Genoa, Florence, Augsburg, Nuremburg, Cologne, Frankfurt, Antwerp (in the County of Brabant, which was only ever half ruled by the dukes of Burgundy and Austria).

With safety from confiscation, merchants are free to invest their wealth in generating returns. This is something that no one else was doing in the early modern period. Wealth that accumulated to the noble class was spent on wars or prestige (gold trimmed clothes, fancy feasts, Michelangelo, things like that). Wealth that accumulated to the Merchant class was re-invested. Since only a few of these merchants were doing the trade building, there were profits aplenty, especially considering that the nobles, far from being competition, were pouring money into the Merchant's coffers.

Merchants in countries with stronger monarchies would be subject to repeated confiscations. This was done through the parliments of the time, such as the Estates General in France and the various Cortes in Spain. England's parliment, on the other hand, had a richer tradition of opposing the Monarch as was not so pliant. So merchants in wealthy but confiscatory nations like France and Spain would invest their wealth in places where it was safer, and merchants from places where wealth was safer did a lot of the business in rich monarchies. Examples of this are the Fuggers and Welsers from Augsburg in Austria/Spain, the Dorias from Genoa in Spain, and various Florentine bankers like the Medici for France and the Pope.

This explains why the income of the Dukes of Milan in the early 1400s was equivalent to that of the Kings of France, who had probably 50 times as many subjects. Liquid capital gravitates to places where it can be invested, and in an Rennaisance/Late Medeival setting, those places are merchant republics and Imperial Free Cities and Hanseatic Leagues and such.

Also worth a note, this really isn't restricted to pre-industrial societies. Look at the explosive growth of city states like Hong Kong and Singapore in the modern world. Nation states are the rule in the first world, but I suspect that an independent city state of San Francisco or Manhatten would be fabulously wealthy, even more so than now. The information economy and financial sectors and the income inequality that they cause would make being a city state more viable than ever.

Answer 4

All excellent answers so far but I think the question everyone's been answering is "why do trade cities form?" rather than "what makes trade cities rich?".

To understand how trade cities become rich you need to understand the nature of trade and the difference between worth and value. Merchants buy goods for their trade value which is lower than their actual worth, this is what enables merchants to sell their goods for a profit. This isn't really as unfair as it sounds, the farmer's time is better spent farming, the blacksmith's time is better spent blacksmithing, for them the merchant makes selling their goods quick and easy.

Conversely when the farmer needs new tools and the blacksmith wants to buy groceries they could buy these things from each other but the merchant is more conveniently located and has a variety of goods ready to sell. So when both buying and selling the merchant is making a profit which makes trade towns/cities a sort of fiscal gravity well. Thus the more productive the surrounding area and the easier it is to transport goods to and from the town/city the more wealth will gravitate towards it and the faster it will do so.

Answer 5

Answering only the third part of the question:

Is travel by land actually so much more expensive than by sea that even slightly less optimal cities already couldn't compete?

For bulk goods? Absolutely.

Even small boats can carry tens or hundreds of tons of cargo. Cutty Sark had a capacity of 1,700 tons according to Wikipedia. In the modern era, "Panamax" ships might carry 50,000 tons.

By comparison, horse-drawn vehicles can manage a few tons maximum, and that's only on good flat roads at low speeds. And you need at least one driver per wagon. Not to mention the expense of horses.

(Think of a four horsepower lawnmower engine. Now imagine it trying to pull a load uphill.)

So pretty much all agricultural trade (which is most trade in the pre-modern era) would be by water. Not necessarily on the open sea, quite a lot of it would be by river barges or coastal cutters. This is why, when engineering developed, it was considered economical to deploy hundreds of men to cut great level channels across the countryside for barges to travel: canals!

This is also why so much European pre-modern settlement was on rivers, coasts or both. A large landlocked city would have issues moving enough food in on a daily basis until the invention of the railway - at which point London (and other already large cities) explode in population.

I suspect neither Ravenna nor Venice would be trading overland with Germany - the Alps are in the way! It would probably be far easier to ship to Hamburg than to cross the Alps.

Answer 6

Several different factors which "encourage" business at ports:

• When ships were powered by oars and sails, ports were a necessity. A galley, even with sail assists, could only stay at sea for a few days.
• A sailing ship could be held up at a straits for weeks by adverse winds. Look at the history of the word embayed. One old meaning was a ship held in a bay by adverse winds.
• In medieval times rules might give a port staple rights which forced traders to enter port and unload their goods.

Answer 7

Trade and services accompanied with it make the citizens rich and the city taxes them.

• Merchant buy and sell with profit; the larger market, the smaller profit but the more opportunities for trade;
• Craftsmen buy materials and sell goods; the larger market, the better supply and the bigger demand;
• Innkeepers offer services for profit; the larger market, the more customers.

All the reasons above have slight positive feedback and al the people pay taxes. The cities have usually better prices than their "customers" so that they can develop a force (army) to protect their interests.

Answer 8

I'm going to say that everyone is so far is basically wrong, especially the accepted answer.

Been studying this exact question of late, focusing on Venice and Golden Age of the Netherlands which also coincided with a 80 year long war to the knife war of independence against the Habsburg Spain.

What's really interesting is that trading cities grow not only rich, but militarily powerful vastly out of scale with their populations as well as ALWAYS becomes the centers of arts, sciences, law, religious freedom and evolving human rights in their eras and regions.

Both Venice and the Netherlands started out with vast resources of... mud, murderous neighbors and a sea that liked to try vacation in the mountains occasionally. It was material that made them wealthy, it was human capital.

Meritocracy and voluntary association...that's what makes them rich.

The key factor in trade is the trader has to leave his own political jurisdiction, where he can pull the old, "Don't you know who my daddy is?" bit and instead travel far away where no one give a bleep who or what the trader is. Long distance travel, especially sea travel is crucial. Separates daddies boys from the orphaned but skilled.

Either someone can captain a ship way over the horizon, puzzle out the language and customs, negotiate a deal and then make it back home with a profit...

….or they can't. If they can't, they drop out of the game.

Even back home, the powerful find it increasingly difficult to use privilege to get their way because again, far away strangers, the sea and deserts don't care just because you come from a nobel family with lots of patronage and any of the three will kill you if you make a slip.

Pretty soon a meritocratic class of traders, artisans and technicians (like skilled sailors) become vitally import. This in turn causes a relative decentralization of political power, which leads to more meritocratic promotion, more social cohesion and overall better decision making.

Investment becomes utterly voluntary as well. Resources flow those who have proven they get the job done whether that means long distance trading, building dykes or waging a private guerre de course against a world superpower that is literally minting most of the money in the world. People learn to bribe, weeddle, cajole but they can never force. In the end, it is empirical success that chooses projects, products and the people who manage them.

Now, compare the same process in the competitors of the Netherlands or Venice. Leadership selection? Mostly by birth rank, then patronage, then bullying or outright threats. Project selection? Almost entirely political with the focus on image of the leadership that anything else because, surprise, its all paid for by money extracted literally at knife point. If things implode, well the king is not going to get blamed is he?

It is the development of vast human capital on all levels that makes trading cities rich and powerful. They can literally start with nothing, Venice certainly did, but using proven merit to advance individuals and interest and by preferring voluntary association and consensus, they became staggeringly rich and powerful.

But it's not just trading cities. Every sudden Empire in history, Athens, Rome, Ghengis Kahn, the early Muslim etc all also grew orders of magnitude more powerful than than their competitors merely by using merit selection. Athens was forced into democracy and merit selection by the pressure of the Persians. Rome by the Kings and the Gauls. Ghengis Kahn rose from two-bit eternally feuding step nomad riding deranged shetland ponies to the Emperor of a 6th of the Earth's surface, when he killed his best childhood friend so he could implement leadership selection by merit. Mohammad and the first few generations of his successors, managed the same trick, allowing a bunch of desert raiders to wipe out the Persian and conquer half of Christendom, India and Eastern Africa.

Merit, empirically selected, is all it takes. Doesn't take resources of any kind, doesn't take a large population, doesn't take good luck. Just merit selection.

Merit lets a people turn literal mud and flood into wealth and empire.

Of course, in the end that very wealth and power does them end. Succeeding generations take everything for granted, forget merit and start playing the usual games of protection, privilege and patronage. People get ahead by gaming the system, sucking and threatening.

It's still going on. Bonus points if you chart the rise and fall of different economic zones in the US and correlate them with particular strongly anti-mericratic organizations and political ideologies.

Answer 9

Four other things to consider amongst all the good answers already:

One has been touched on briefly, and that's quality institutions. It's a big area of research in sociology, political science and economics, whether a good economy leads to good institutions or good institutions lead to a good economy. Most research I'm aware of suggests that good institutions tend to come first, though it's by no means a "closed" issue. Here is one seminal economic paper on the issue.

Particularly in ancient times, good institutions were few and far between. Enforcing contracts, legal protections, and so on, are things that, once they arise, lead to all sorts of other opportunities. In other words, once a city has good institutions it becomes a good place for trade, but also a good place for all sorts of economic activity beyond trade. In this case, trade is not necessarily what leads to a city becoming wealthy; both trade and wealth are instead consequences of good institutions. This might help explain why some port cities were wealthier than others, or why some got rich and others didn't.

The second is related to trade, and that's comparative advantage. It's covered in any introductory economics course, but in short it's the idea that if city/country/region A is better at producing (for example) guns than they are butter, and B is better at producing butter than guns, each can specialize in what they're best at and trade, making both A and B better off than either could be alone. This holds true even if A has an absolute advantage; that is, they're better at producing both guns and butter than B is.

Another trade benefit is skill transfers. Ports are easier to travel to from far away than non-ports, and people often come along with goods when trade is opened up. Particularly in the pre-industrialization (and especially in the pre-internet) age, there could be huge disparities in skills across geographic regions. Therefore, people then often bring unique skills with them as they travel to and through the ports. This leads to obvious benefits.

And one final benefit a trading hub might experience is variety. This is the root of New Trade Theory, the area Paul Krugamn won his Nobel for. The simple part of it that may be relevant here is that people care about cost, but they also love variety. No place in the ancient world would have variety like a trading port. Thus it becomes an extremely attractive place to be, and naturally the people with resources are the ones who can afford to move to such places.

Answer 10

There are two types of trade: commerce (exchange) and profession (crafts).

When we talk about trading cities in a pre-industrial-revolution setting, most likely the "trading" is about guilds, small industries and the like.

So the riches of trading cities come from having lines of production adding value to many sorts of base, often cheap materials. The finished goods are then sold (by trading/commerce) abroad, and also used locally: as there is little/no transport expenditure, the citizens have access to cheaper finished goods and so enjoy a higher standard of living, when we compare with other less industrious cities.

Answer 11

I'm glad you asked this question. Ricardo discovered the concept of Comparative Advantage. Cities, regions, and even individual people all have advantages and by trading they are better off overall.

Here is some game theory to prove how cities can both be better with trade: http://www.youtube.com/watch?v=NdHsqTEW9Xc

And this one shows how even if your city has an absolute advantage in everything, you are still better off trading: http://www.youtube.com/watch?v=AF9nJuOaGJ0

Answer 12

I don't believe I seen the value added commodity. Trade cities get large amounts of raw material but by packing, adding ingredients, or from say changing ore to iron you really generate a lot of economic activity.