Political Economy of Medieval Europe

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The Political Economy of the Medieval Church
Article · January 2012

DOI: 10.1093/oxfordhb/9780195390049.013.0016
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Robert B. Ekelund, Jr., Robert F. Hébert, and Robert D. Tollison
The Oxford Handbook of the Economics of Religion
Edited by Rachel M. McCleary
Print Publication Date: Jan Subject: Economics and Finance, Economic History, Economic
2011 Theory and Mathematical Models
Online Publication Date: Sep DOI: 10.1093/oxfordhb/9780195390049.013.0016
2012
Abstract and Keywords
The exact starting and ending dates of the Middle Ages may be difficult to specify, but
historians are virtually unanimous that the period, however demarcated, represented the
high tide of Christianity in Western Europe. Medieval Europe provides an interesting
case study, not only of religion and politics, but of the overlap between them, which was
far greater in medieval society than it is today. The medieval Roman Catholic Church, as
an economic and political entity, attempted to accomplish its otherworldly goals in this
world by acquiring power and influence. Most large corporations need access to capital
markets to grow and prosper. The medieval Church was no exception, but it was
constrained by its own admonitions against “laying up earthly treasure” and “serving
Mammon instead of God.” This article discusses the political economy of the medieval
Church, focusing on its response to the Crusades and also considering purgatory,
indulgences, and the Protestant Reformation, as well as marriage as a sacrament.
Keywords: Roman Catholic Church, political economy, Middle Ages, marriage, capital markets, Europe, Crusades,
purgatory, indulgences, Protestant Reformation
1. Introduction
The exact starting and ending dates of the Middle Ages may be difficult to specify, but
historians are virtually unanimous that the period, however demarcated, represented the
high tide of Christianity in Western Europe. Medieval Europe provides an interesting
case study, not only of religion and politics but of the overlap between them, which was
far greater in medieval society than it is today. Before the emergence of modern nation-
Page 1 of 18
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states, the kingdoms of Europe were dominated by monarchs, most ruling kingdoms
composed of feudal fiefdoms and some stronger than others, but all facing severe
problems of administrative control. In its medieval manifestation, government was not
the unifying force it is touted to be in contemporary societies. A far more unifying
institution of medieval society was the Roman Catholic Church.
(p. 306) The Roman Church held monarchs and other secular leaders at bay for several
reasons. The papacy was a monopoly in the competition for power—a monopoly possibly
dating as far back as Charlemagne—against monarchs and feudal lords. But most
important, polities in the medieval period were at the mercy of the Roman Christian
monopoly over the supernatural belief system. Rome’s approbation of a secular leader
meant support by his or her subjects. The Church was able to use Christianity and
particular doctrinal innovations as weapons to receive benefits in its dealings with both
Church members and in the secular political world.1 In addition, the Roman papacy was
itself a potent secular power owning, by most accounts, more than one-third of the arable
land in Western Europe by 1100 (perhaps much earlier than that).2 Thus, the working
premise of this chapter is that although the medieval church had public interest
objectives and functioned in part as a quasi government, its decision-making nexus can
be better understood as taking place within the context of an economic firm with political
power.
The medieval Church was a complex and far-reaching institution. It provided public as
well as private goods and established guidelines and standards of moral behavior for king
and peasant alike. It’s preeminence in Western European society and its transnational
scope, certainly by 1100, gave it monopolistic power beyond the reach of any single
country or monarch. Until the Reformation, competing religions in Western Europe were
severely limited in number; when alternative creeds arose, they were quickly put down as
heretical by the Roman Catholic Church. The medieval Church became a dominant
institution, guided in part by spiritual objectives but operating, ineffably, in a temporal
world. Its position of dominance gave it substantial monopoly power, which the
institutional Church used to its advantage to further its influence and prestige.
By its nature, monopolistic behavior has important economic consequences. Social

scientists working in the field of religion therefore face the following uncomfortable
circumstance: although its stated goals were spiritual, the medieval Roman Catholic
Church functioned in large measure as an economic and political firm, making decisions
about the nature and characteristics of its “product” as well as establishing the
organizational structure to provide that product—with various quality assurances—to its
customers, the religious faithful. In other words, the Catholic Church could not help but
be a key economic and political player in the medieval world. The ultimate consequence
of this behavior was the successful entry by Protestants in the early sixteenth century.
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Accepting this premise, we offer an economic explanation of Church policy in several

areas where spiritual and earthly concerns were clearly intermingled.
2. Organization of the Medieval Church: A Contemporary

(p. 307)
Analogy
Historical facts suggest that at the height of its political and economic might, the
medieval Roman Catholic Church functioned as a powerful and sophisticated
corporation.3 It produced a “product” or “service” many people felt they had to have: the
salvation of their immortal souls. It established effective spans of control by organizing
along divisional lines, with authority flowing from top to bottom. It adopted an internal
management structure that established incentives for “efficient” behavior on the part of
the clergy and maintained supervisory control through legal and financial means. It
organized itself in a sophisticated manner that centralized long-term, strategic policy (in
the Vatican) but decentralized authority over day-to-day decision making (in dioceses and
parishes). It established a highly effective fiscal mechanism that facilitated the flow of
funds from decentralized, downstream firms to the centralized, upstream bureaucracy in
Rome. In many respects, the medieval church fit the pattern of a modern, multidivisional
(or M-form) corporation.4
Demographic and technological considerations prevented the medieval Church from

becoming the kind of cohesive, monolithic corporation of the sort one finds in
contemporary society. Its ability to centralize was restrained by widely dispersed
population and by slow and unreliable communication. Nevertheless, in certain respects
the medieval Church was remarkably similar to the modern multidivisional firm. The pope
served as its CEO; the Curia, or College of Cardinals, as its board of directors; abbots and
bishops managed downstream franchise operations. The Vatican, or general office, was
principally concerned with strategic decisions involving planning, appraisal, and control,
including the allocation of resources among competing operating divisions. Operating
divisions, in turn, were given responsibility of day-to-day administration and
implementation.
Rather than distinguish its product by physical differentiation, as many contemporary M-

form firms do, the medieval Church offered a uniform product that was distinguishable
along divisional lines. Parish churches served mostly the poor and middle classes;
monasteries catered to the needs of higher income individuals and those more
intellectually inclined; cathedral chapters served urban dwellers and traveling pilgrims,
who contributed to their upkeep. The medieval Church also acknowledged national
Page 3 of 18

boundaries, maintaining the same liturgy and dogma but imposing different expectations
on English, French, and Italian churches.5
(p. 308) Minor differences notwithstanding, the medieval Church came sufficiently close
to an M-form corporation to permit economists to use that form as a working model. The
medieval Church had a major transnational advantage at a time when governments and
businesses were almost entirely local in their planning and execution. Fiefdoms, city-
states, and decentralized polities of many kinds typified Europe at this time.
Furthermore, the Church focused on a long-run agenda in contrast to the relatively short-
run planning horizons of governments and businesses. This difference is important
because unlike medieval governments, the Church had strong incentives to promote
global economic development, which ultimately enhanced its own revenues.
3. Doing Good by Doing Well or Doing Well by Doing Good?

The spiritual life of the medieval Church, as well as its attendant goals and objectives, are
not under scrutiny here. Rather, we focus on the medieval Church as an economic and
political entity. It attempted to accomplish its otherworldly goals in this world by
acquiring power and influence. At some point, the Church recognized that its survival and
prosperity depended on its institutional hegemony. Thus, even if every agent of the
medieval Church totally subrogated his or her individual interests to the corporate
interest of the institutional Church (i.e., the salvation of souls), economic and political
considerations would inevitably intrude nevertheless. Strict adherence to Christian
principles might suggest that the Church could “do well by doing good”; the actions
undertaken by church authorities in promoting the salvation of humankind could just as
easily be rationalized as a case of “doing good by doing well.” In other words, the
medieval Church could be expected to justify its quasi-monopolistic power as an essential
element in carrying out its mission to save souls. However, economics tells us that
monopolies typically generate adverse consequences for consumers.
With few exceptions, the tendency of traditional religious and Church history has been to
either ignore or denounce the economic actions of the medieval Church. Apologists take
one approach, critics take another. But neither approach results in dispassionate
analysis. Truly dispassionate analysis in matters affecting religion is certainly elusive, but
that does not obviate the attempt. This chapter demonstrates (p. 309) that economic and
political motives provided broad underpinning for medieval Church policy in areas
customarily taken to be spiritual or doctrinal. Our analysis requires the use of an
economic model, or more colloquially, an economic way of thinking. We shall leave to
Page 4 of 18

others the judgment of whether the consequences of Church behavior, either intended or
unintended, were good or bad. In examining the economic motives of the medieval
Church we concentrate on three main elements of medieval life in which the Church
played a prominent, prescriptive role: marriage, credit, and war.
4. Marriage: Sacrament or Contract?

Fundamentally, marriage is a contract (ordinarily without contingency claims) between
two parties, recognizing mutual love and respect and imposing certain duties and
responsibilities. Contracts are common in the business world and are considered
essential to the smooth functioning of market-oriented societies. Most contracts are
sanctioned and enforced by civil societies, as marriage was in the Roman world. On its
face, there is nothing in the essential nature of marriage that imbues it with religious
meaning. Nevertheless, in the Middle Ages the Roman Catholic Church raised marriage
to a sacrament and captured the marriage market by implementing a twofold strategy. In
the first place, it linked regulatory compliance of its marriage laws to eternal salvation. In
the second, it varied its interpretations of what constituted a valid marriage in accord
with certain economic objectives.
Kinship groups, substituting for the lack of insurance markets in medieval society, were
of vital importance in facilitating activities such as arranging marriages, transferring
property, and monitoring group members to prevent malfeasance. Theoretically, the size
of the kinship group in the Middle Ages depended on the nature and development of
property rights. The less developed the system of property rights and its enforcement
mechanisms, the stronger the need for “insurance,” or its substitute—the kinship group.
The absence of strong governments and limits to existing government’s span of control
undermined the security of individual property rights.
Medieval monarchs and nobility customarily used marriages to consolidate and/or

enlarge kingdoms and estates. The power to control marriages bestowed clear economic
benefits, which motivated interested parties to seek control. Thus, marriage regulations
encouraged rent-seeking activities by vested interests. One family, favoring a “merger,”
could pressure for easing marriage rules that impeded (p. 310) consolidation. Another
family, wishing to reject a family merger, could invoke prohibitions against “incestuous”
marriages (Gies and Gies 1987: 52) or lobby for new prohibitions. In other words, the
institutional makeup of medieval society presented ample opportunities for interested
parties to engage in rent seeking.
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Consider an example of how the medieval church manipulated marriage “policy” to attain
both political advantage and private rent-seeking gains from members. King Robert the
Pious (996–1031) of France (of the Capetian dynasty) married one Rozala, a claimant to
the throne of Italy. Robert had married for political gain but was unable to have heirs
with her. Dismissing her, he next married Bertha, the daughter of the king of Burgundy,
but she was a cousin within the “third degree” of relationship (Smith 1972: 77–78).
Gerbert, the archbishop of Rheims who later became Pope Sylvester II (999–1003)
refused to allow the marriage, but it was performed anyway. A synod and Pope Gregory V
condemned and excommunicated Robert if he stayed with Bertha. Robert continued to
disobey for some time. But the pope and his cousin, Emperor Otto, blackmailed Robert to
relieve the pope and his monks at Cluny and Fleury from secular supervision (Duby 1978:
46–48). This trade-off allowed Robert to get a legal divorce, which enabled him to marry a
third time, a marriage that was successful in producing two male heirs. This kind of deal
was part and parcel of medieval Church manipulations of politics to its own advantage.6
Evidence consistent with monopoly and rent seeking in the marriage market (Ekelund et
al. 1996: 100–104) is bolstered by the medieval Church’s practice of price discrimination.
Wealthy Church members always had access to dispensations and special treatment from
high clerics for a fee. Individuals with differing elasticities of demand for church
marriages typically self-selected services from among those offered. Moreover, the
medieval Church applied regulations and enforcement unevenly across countries as well
as among nobles in each country. For example, clandestine marriages based on present
mutual consent were treated as civil cases in English ecclesiastical courts; those based on
a future promise to marry were subject to criminal penalties in France.
5. Capital Markets: Faith or Profit?

Most large corporations need access to capital markets to grow and prosper. The
medieval Church was no exception, but it was constrained by its own admonitions against
“laying up earthly treasure” and “serving Mammon instead of God.” (p. 311) A detailed
analysis of medieval Church history reveals that the Roman Catholic Church was adept at
doctrinal innovations that served to further its economic goals, such as restricting
competitive challenges to its monopolistic market position. The most overt economic
doctrine of the medieval Church was its doctrine concerning usury—charging interest on
a loan.
The Roman Catholic Church did not invent the doctrine of usury or the concept of just
price with which it was closely allied. But it treated the price of money, as well as the
Page 6 of 18

price of goods, as an ethical issue, taking justice rather than economic efficiency as the
goal of policy. Ostensibly this is consistent with a public-interest theory of corporate
behavior; however, it can be shown that Church officials manipulated the usury doctrine
to further its institutional interests. The medieval doctrine of usury was confusing
because legitimate forms of interest taking existed alongside a general prohibition that
lenders should not gain at the expense of borrowers. This created a double standard that
became increasingly arbitrary over time, thereby creating opportunities for exploitation
by those who made the rules.
The medieval Church worked both sides of the credit market, sometimes lending and
sometimes borrowing. When the Church was a lender, it shadow-priced its loans inside
the Church at market rates (or higher), thus extracting economic rents. When it was a
borrower, it invoked the doctrine of usury to keep the cost of credit down, thus extracting
economic rents in the form of cost concessions.7 Moreover, through selective
enforcement of the usury prohibition, the Church could indirectly increase the supply of
credit available to itself by decreasing the supply of loans to the laity. Though
fragmentary, Vatican records show a pattern of selective enforcement and opportunistic
behavior.8 Usury came to be classified as either certa (cases involving known victims) or
incerta (cases involving unidentifiable victims). The Church allowed known victims to
receive certae restitutions, but required incertae restitutions to be given to the poor or
directed to pious purposes. As one would expect in a rent-seeking society, the practice
evolved of issuing to certain clerics “licenses” that entitled them to a percentage of
incertae restitutions, a development that provided licensees an incentive to maximize the
number of incertae restitutions they could control.9
The death of a rich merchant often provided an opportunity for the Church to seize
wealth in the name of restitution. A papal decree of the thirteenth century bestowed
power to take the wealth of intestate laymen and church clerks (Paris 1872–1873: 4:552,
604–605). It was revoked only after lay authorities vigorously objected. Undeterred, in
the same year the pope laid claim to the profits of deceased usurers in England, naming a
religious order (the Brothers Minor) as his proctors (p. 312) and specifically directing
them to “inquire concerning living [and dead] usurers and the things wrongfully acquired
by this wicked usury … and … compel [restitution] by ecclesiastical censure” (Paris 1872–
1873: 4:564–650).
Church officials routinely looked the other way for favored transgressors but continued to
condemn “manifest, public usurers,” such as Jewish money lenders, when it was in their
interest to do so. Nelson (1947: 120–121) claimed that the Church’s selective
enforcement dichotomized the medieval merchant-usurer into “two disparate figures who
stood at opposite poles: the degraded manifest usurer-pawnbroker, as often as not a Jew;
Page 7 of 18

and the city father, arbiter of elegance, patron of the arts, devout philanthropist, the
merchant prince” (see Botticini and Eckstein, chapter 3 of this volume).
Because the medieval Church was both a demander and a supplier of loans, it occupied a
unique place in that era’s credit markets. The Vatican treasury (camera) borrowed
frequently on favorable terms that were, in some cases, lower than the deposit rates paid
by the Medici bank (Schulte 1904: 5–7; Arias 1905: 548; Homer 1977: 107).10 Papal
demand for loans was especially heavy during the Crusades and other territorial
campaigns (see following discussion). Beginning in 1245, the papacy accumulated large
debts in its attempt to gain control of the kingdom of Sicily, although the terms of such
loans are not known. Lunt (1939: 227) maintains that these loans bore interest and that
the Italian bankers were pressing Pope Urban IV for payment in 1262. Despite the lack of
complete and detailed records, it appears that Church loan activity continued unabated
throughout the Middle Ages. A cameral document of 1492 lists forty-seven papal
creditors to whom the Vatican owed a total of 128,424 ducats, which was approximately
half its estimated income for that year (Clergeac 1911: 268–271).
The medieval Church’s lending activities are more obscure and difficult to trace than its
borrowings. Some historians maintain that the Catholic Church was not a lender—that its
capital derived entirely from taxes, traditional dues, and tithes. But Vatican documents
suggest otherwise, that the apostolic camera routinely loaned money “in house” to its
own clerics for a wide variety of purposes. Most of the papacy’s lending was done at
arm’s length through papal bankers who were not clerics but acted as papal agents. The
most common situation was one in which illiquid clerics were forced to borrow to make
required payments to the camera, for example, to secure higher ecclesiastical rank—a tax
or fee called servitia (Snape 1926: 103–104; Lunt 1934: 2:236–239, 257–259).11 Overall,
the medieval Church operated on both sides of the loan market. It borrowed freely from
its own bankers and quietly made usurious loans to its prelates (or forced them into such
loans), while outwardly denouncing public usurers.
(p. 313) 6. Crusades: Holy War or Market Retaliation?

Muslim conquests and the encroachment of Islam into the Iberian Peninsula during the
Middle Ages presented the Roman Catholic Church with a growing threat to its territorial
(and spiritual) hegemony (see Iyigun, chapter 11 of this volume). Between the eleventh
and thirteenth centuries, a number of religious wars ensued that have come to be known
collectively as the Crusades. The Crusades created an enormous demand for capital and
manpower, which the Church responded to in the same manner as wartime governments:
Page 8 of 18

it increased taxes and fees on its members and administrative units and borrowed
heavily. In fact, its usury doctrine not only provided a pretext for obtaining credit on
favorable terms, it was also used by the papacy to address manpower needs. In his
attempt to encourage enlistment of soldiers, Pope Innocent III exhorted bishops to
pressure lenders, under threat of excommunication, to absolve combatants from usurious
loans (Lunt 1934: 2:86). Papal edicts of 1146, 1187, and 1188 exempted Crusaders from
paying usury on past loans as well as any new loans contracted while in service to the
Church (Tyerman 1988: 196). Such decrees had the effect of increasing lenders’ risk, and
in the end often ruined a Crusader’s credit. Nevertheless, the usury doctrine persisted
until the Church no longer found it in its interest to enforce it.
Religious motives aside, the Crusades pose an example of how warfare can be used as a
means to achieve market dominance. In the language of economics, the medieval Church
was in the business of selling a meta-credence good (assurances of salvation). Central to
the maintenance of its market position, therefore, was the credibility of claims about its
promise, or product. What was radical about the Crusades is that the Church embraced
the premise that military action was a legitimate means to achieve its objectives. It would
appear that for the medieval Church, the end justified the means. Rents to the papacy
were both direct and indirect. Direct rents came chiefly from tourism, the sale of relics,
new taxes, and new “products.” Indirect benefits came from increased domestic peace
and order and from expanded commerce and trade. Because of space limitations, we
concentrate only on the direct benefits of the Crusades.
Among the Christian faithful, it was widely believed that a pilgrimage to Jerusalem and
other holy places conferred spiritual advantages on the pilgrim, ranging from the
absolution of sins to the cure of bodily ills. To take advantage of this belief, the Church
encouraged all manner of religious tourism and quickly recognized profit opportunities
from visitations of the faithful. Pilgrims reserved their (p. 314) largest donations for
places connected to the major events in the life of Christ, but they also made minor
donations to churches and abbeys en route. Not surprisingly, monasteries and churches
tended to locate so as to “enshrine” the holy places and thereby control access to the
main attraction. In Jerusalem, for example, the Church of the Holy Sepulchre became a
major attraction because it was built on the site of the tomb of Christ. It remains so
today. Many Christian denominations and orders, including Roman Catholic, Orthodox,
Armenian, Syrian, Coptic, and others dispute control over the site, in part for spiritual
prestige and revenue. In terms of the quantity of revenues generated by pilgrimages, it
matters little whether remittances are treated as gifts made from religious conviction or
as the price of a ticket to see a major attraction (e.g., the Disney World phenomenon).
The Church also exploited religious relics as a source of revenue. Unlike the holy places
to which pilgrims flocked, relics were tangible, portable, and easily smuggled; they lent
Page 9 of 18

themselves to an active market. Churches not located in the Holy Land became willing
buyers of relics as a way of enhancing their tourist revenues. The Vatican clearly
understood the financial benefits derived from the monopolization of the supply of holy
relics, which provided another economic rationale for the Crusades.12 To be sure, an
active trade in relics preceded the Middle Ages, but the Crusades spawned a renewed
frenzy, which led to many problems of internal control for the Church. Forgeries
proliferated from the start, and competition between churches often got out of hand. The
papacy’s ability to authenticate most relics was limited, as was its ability to suppress
forgeries. But so were its incentives to do so. It is not clear that the Church had an
incentive to discourage counterfeits as long as the relic, real or imagined, served to
attract tourists and enhance church revenues.
In addition to other revenues stimulated by the Crusades, holy wars provided a fiscal
rationalization for new taxes. Gilchrist (1969: 38) explains how the papacy established
special taxes to pay for the wartime expenditures, including the first income tax imposed
on the clergy, which set a precedent in both ecclesiastic and secular administrations.
Clerical income was in large part obtained through control of agricultural lands and rents
therefrom. Thus the income tax was also a tax on clerical lands and properties. In
addition, fines were imposed for blasphemy and other sins, and special levies were
imposed on secular rulers. According to Lunt (1939: 607–608) the Church raised forty-
three new levies between 1188 and 1326, an interval that covered most of the crusading
period.
Whether or not Church revenues exceeded Church expenditures during the Crusades is
an open question. Finucane (1983: 48) maintains that by “the end of the (p. 315)
thirteenth century, the call to crusade seemed to many, both clerical and lay, to be no
more than a thinly-disguised way to raise money for both kings and popes for a variety of
purposes unconnected with the Near East.” Perhaps it occurred to medieval Church
administrators, as it has to present-day politicians, that a “crisis” is an opportunity not to
be wasted.
Possibly the most neglected and least understood rent-seeking device used by the Church
during the Crusades was the creative use of its usury doctrine to increase Church
revenues, as intimated in the previous section. As lender, the Church profited from
making loans to Crusaders, who needed cash to finance their soldiering. According to
Tyerman (1988: 28, 204), Crusaders “needed cash, and the commonest source of cash in
the twelfth century was religious houses.” Soldiers in the Middle Ages were attracted to
war as a form of plunder, but like most entrepreneurs, they needed financial capital to
launch and sustain their enterprises. During the Crusades, none other than the Church
itself offered banking services to its enterprising soldiers.13
Page 10 of 18

A prominent and telling example of how the Church behaved as a sophisticated

monopolist with multiple objectives is presented by the conjunction of its efforts to
recruit Crusaders on the one hand and its ability to innovate at the doctrinal level on the
other hand. A papal decree during the Second Crusade declared Crusaders exempt from
usury—that is, they were held sinless for borrowing at interest to finance their activities.
Of course, lenders were under no legal obligation to lend at zero interest; any such
decree or law to that effect would have been completely unenforceable. Thus, Tyerman
(1988: 196–197) claims the intent of the exemption was to dry up secular sources of loan
capital, giving the Crusaders “little recourse but to borrow from the church itself.”
Yet another direct source of revenue from the Crusades was the buy-back of crusading
vows by those who subsequently regretted their pledges. The usual penalty for reneging
on a crusading vow was excommunication, but the Church offered an alternative whereby
the soldier’s “contract” could be bought out. Only after 1219 was this option available on
a regular basis, but earlier selective exceptions were made. The practice became rife as
the Crusades loss popularity over time. As one historian put it, “while prelates spent their
money on fine horses and pet monkeys, their agents raised money by the wholesale
redemption of Crusading vows” (Runciman 1954: 339). Officially, the redemption price of
a contract was the expected cost of the Crusader’s journey to the Holy Land. But
Tyerman (1988: 193–194) claims that actual payments often were lower. This suggests
that buy-backs were calculated to encourage more redemptions, but why would the
Church do so? In reality, the Church had to balance its need for cash with its need for
manpower, a (p. 316) need that induced the Church to engage in doctrinal innovation.
One such innovation was the crusading indulgence.
Technically, an indulgence provides remission of afterlife penalties imposed on sinners

(i.e., purgatory), not forgiveness of the sin itself. However, local agents of the Church
(with the tacit approval of Rome) often fostered the belief that indulgences wiped away
sin itself. If we regard penance as a kind of “sin tax” then we may likewise treat
indulgences as a form of “tax credit.” Originally granted only to soldiers who fought in
the Crusades, the awarding of indulgences became so commercialized that the Church
openly sold these “tax credits” for cash payments, thus providing another source of
revenues linked to the Crusades. Initially, revenues from indulgences were collected by
local prelates who allocated the proceeds locally to finance the crusading effort. But
gradually papal administrators took control of the flow of funds. There is a strong
suspicion among scholars who have examined the extant fiscal documents of the papacy
that such funds never left Rome after 1261.14
Page 11 of 18

7. Purgatory, Indulgences, and the Protestant Reformation

Purgatory and its attendant innovations (auricular confession and the granting of
indulgences) was the likely spiritual catalyst for the successful entry of Protestant brands
of Christianity. This halfway house from earthly life to heaven was designed as a holding
tank for individuals who must fully expiate their earthly sins. The key to mitigating the
time spent in purgatory—interestingly defined as human time though clearly signifying
some “eternal” time—was through earthly prayers and good works but also through the
use of indulgences. Some indulgences could be paid for in money; others were earned by
prayer. Official Church documents (papal bulls dealing with indulgences), sanctioned
differential pricing for these tickets out of purgatory. Vatican records provide clear and
surprising pricing schemes for these benefits, price schedules with multiple tiers. The
most elaborate scheme was developed by Jasper Ponce, the papal agent to England
during the papacy of Alexander VI (1492–1503). Ponce’s schedule included three
categories of givers, with each category containing four to seven separate tariffs based
on ranges of annual personal income (see Lunt 1962: 60–64, 494, 586). This coterie of
product (p. 317) innovations and most especially the use of plenary indulgences,
expiating all time in purgatory, was the tipping point for Luther’s successful entry into
the Christian market in the early sixteenth century. Increasingly intricate price
discriminatory (first- or second-degree) schemes in the sale of indulgences brought
Roman Catholic Christian demanders to the margin of purchase. Luther’s innovation
stresses an all-or-nothing offer of an afterlife with a lower entry price—salvation was
determined by faith alone, which marked a return to Roman Catholic teaching prior to
the innovations of the high Middle Ages. In contrast to Roman teaching, Luther
maintained that “everyone is a priest”; hence, no one requires an intermediary between
him- or herself and God. Luther used Protestant simplicity and the flagrant financial
abuses of the Church to make good his entry into the market for Christian religion.
Reformers, such as Zwingli and Calvin, followed with similar entry devices.
8. Conclusion
After a period of spread and consolidation, Roman Christianity inched toward monopoly
under the Merovingian and Carolingian monarchs and under the aegis of Holy Roman
Emperors. However, the way was paved for Roman religious monopoly with the
breakdown of unified European power in the tenth and eleventh centuries. Strong nation-
states had yet to develop. At this point the Roman Catholic monopoly achieved
Page 12 of 18

supernational dominance over the religion of Western Europe and was able to exercise
opportunistic control over polities as well. The Church used innovative doctrines to
manipulate civil government for myriad reasons, most especially for the homage and
support of the Roman papacy. It collected rents from both civil governments and from its
downstream members.
Monopoly came to an end with Protestant entry in the early sixteenth century. This
development was founded on both “spiritual abuses,” such as the sale of indulgences and
the concomitant lower full price of Christian belief offered by the Protestants (simpler
services, no “intermediaries” between man and God, and other cost-lowering devices).
But the medieval Church monopoly was also facilitated by politics. Protestant entry was
essentially a process of entry into many areas of Northern Europe (England was a special
case). (Southern Europe, including Spain, Italy, and parts of France and Germany,
remained Roman Catholic.) As nation-states gained power in the fourteenth, fifteenth,
and sixteenth centuries, there (p. 318) was resistance to assertions of authority by the
pope and the Roman Catholic Church, especially where tax revenues were concerned.
The German princes refused to put down Protestant “heretics,” and competitive entry
was facilitated. The political support of civil governments was necessary for successful
entry. After Protestantism, some polities still needed approbation and the status of being
Christian, but they did not necessarily need the Roman version. The door to competitive
Christianity was opened, never to be closed again.
References
Anderson, Gary M., Robert E. McCormick, and Robert D. Tollison. 1983. “The Economic
Organization of the English East India Company.” Journal of Economic Behavior and
Organization 4: 221–238.
Arias, Gino 1905. Il sistema della costituzione economica e sociale italiana nell’ eta dei
communi. Turin: Roux e Viarengo.
Blumenthal, Uta-Renate. 1988. The Investiture Controversy: Church and Monarchy from
the Ninth to the Twelfth Century. Philadelphia: University of Pennsylvania Press.
Chandler, A. D. 1962. Strategy and Structure: Chapters in the History of the American
Industrial Enterprise. Cambridge, Mass.: MIT Press.
Clergeac, Adrien. 1911. La Curie et les beneficiers consistoriaux: Etude sur les communs
et menus services, 1300–1600. Paris: A. Picard.
Page 13 of 18

Davidson, Audrey B. and Robert B. Ekelund Jr. 1997. “The Medieval Church and Rents
from Marriage Market Regulations.” Journal of Economic Behavior and Organization 32:
215–245.
DeRoover, Raymond. 1948. Money, Banking and Credit in Medieval Bruges. Cambridge,
Mass.: Medieval Academy of America.
DeRoover, Raymond. 1967. “The Scholastics, Usury and Foreign Exchange.” Business
History Review 41: 257–271.
Duby, Georges. 1978. Medieval Marriage. Translated by Elborg Forster. Baltimore: Johns
Hopkins University Press.
Ekelund, R. B., R. F. Hébert, R. D. Tollison, G. M. Anderson, and A. B. Davidson. 1996.

Sacred Trust: The Medieval Church as an Economic Firm. New York: Oxford University
Press.
Finucane, R. C. 1983. Soldiers of the Faith. New York: St. Martin’s Press.
Geary, Patrick J. 1990. Furta Sacra: Thefts of Relics in the Central Middle Ages.
Princeton, N.J.: Princeton University Press.
Gies, Frances and Joseph Gies. 1987. Marriage and Family in the Middle Ages. New York:
Harper and Row.
Gilchrist, John T. 1969. The Church and Economic Activity in the Middle Ages. New York:
Harper and Row.
Glaeser, Edward L. and Jose Scheinkman. 1998. “Neither a Borrower Nor a Lender Be:
An Economic Analysis of Interest Restrictions and Usury Laws.” Journal of Law and
Economics 41: 1–36.
Homer, Sidney. 1977. A History of Interest Rates. Rev. ed. New Brunswick, N.J.: Rutgers
University Press.
Lunt, W. E. 1934. Papal Revenues in the Middle Ages. 2 vols. New York: Columbia
University Press.
Lunt, W. E. 1939. Financial Relations of the Papacy with England to 1327. Cambridge,
Mass.: Medieval Academy of America.
Lunt, W.E. (1962). Financial Relations of the Papacy with England, 1327–1534.
Cambridge, Mass.: Medieval Academy of America.
Page 14 of 18

Nelson, Benjamin N. 1947. “The Usurer and the Merchant Prince: Italian Businessmen
and the Ecclesiastical Law of Restitution, 1100–1550.” Journal of Economic History 7:
104–122.
Paris, Matthew. 1872–1883. Chronica Majora. 7 vols. Ed. H. R. Luard. London: Longman.
Runciman, Steven. 1954. A History of the Crusades. Vol. 3, The Kingdom of Acre.
Cambridge: Cambridge University Press.
Schulte, Aloysius. 1904. Die Fugger in Rom 1495–1523. Mit studien zur geschichte des
Kirchlichen finanzwesens jenerzeit, Vol. 2. Leipzig: Duncker und Humblot.
Smith, Charles E. 1972. Papal Enforcement of Some Medieval Marriage Laws. New York:
Kennikat Press.
Snape, Richard H. 1926. English Monastic Finances in the Later Middle Ages.
Cambridge: Cambridge University Press.
Tawney, Richard H. 1926. Religion and the Rise of Capitalism. New York: Harcourt Brace.
Tyerman, Christopher. 1988. England and the Crusades, 1095–1588. Chicago: University
of Chicago Press.
Williamson, Oliver E. 1975. Markets and Hierarchies: Analysis and Antitrust Implications.
New York: Free Press.
Notes:
(1) . That is not to say that there were no disputes between secular leaders and the
Church. The so-called investiture controversy, a dispute over secular versus papal control
of the downstream church and the revenues generated there, ranged over the entire
medieval period. See Blumenthal (1988).
(2) . The Papal States, existing until the nineteenth century and constituting a large
portion of the Italian Peninsula, was only a portion of the Church’s holdings. Monasteries
controlling huge holdings of land existed throughout Europe.
(3) . Some of the ideas expressed in this chapter took form and are expanded in our book,
Ekelund et al. (1996).
(4) . The concept of an M-form corporation is commonly attributed to Oliver Williamson

(1975), but there are obvious antecedents in earlier history. Alfred Chandler (1962)
Page 15 of 18

argued that the invention of the multidivisional firm in the early 1920s was a major
organizational innovation. Anderson, McCormick, and Tollison (1983) showed that from
its founding in 1600, the English East India Company employed the principles embodied
in the M-form firm. Undoubtedly other antecedents could be found. The hallmark of the
M-form corporation is its substitution of quasi-autonomous operating divisions (organized
mainly along product, brand, or geographic lines) for the functional divisions of the
traditional corporate structure as the principal basis for dividing tasks and assigning
responsibility.
(5) . Opportunistic behavior had to be policed over much of the medieval period in all
countries. Allowances via-à-vis Roman Catholic ritual were made where pagan worship
was strong, say, in parts of England. Similarly, elements of pre-Columbian ritual find
expression alongside Christian worship today, for example, in parts of South America.
(6) . For other examples see Davidson and Ekelund (1997).
(7) . We do not argue of course that “rent seeking” by lenders is the only (or even the
main) explanation for usury laws. Glaeser and Scheinkman (1998: 26) offer a convincing
explanation that usury laws are a primitive means of social insurance. Welfare is
enhanced, in their argument, when usury laws (and lowered interest rates) act to
increase welfare by transferring income from lenders (with low marginal utility of
income) to borrowers (with high marginal utility of income). As they note, “Individuals
who receive negative income shocks appreciate low interest rates. Restrictions on
interest rates are a way of redistributing income to those who have suffered from these
shocks.”
(8) . De Roover (1967: 266) claims that pawnbrokers and small money lenders were the
chief victims of the Church’s campaigns against usury, whereas “the big bankers with
international connections were left undisturbed. Far from being censured, they were
called ‘the peculiarly beloved sons of the Church’ and prided themselves on being the
Pope’s exchangers.”
(9) . Tawney (1926: 43) cites the case of a Paris bishop who urged a usurer to dedicate
his ill-gotten wealth to the construction of Notre Dame Cathedral rather than make direct
restitution. De Roover (1948: 157n) reports a bizarre example involving the estate of a
fourteenth-century usurer from Florence. Despite explicit instructions in his will, all
bequests in favor of the Church were settled fully prior to any restitution granted to
individuals. Moreover, executors of the estate awarded the archbishop of Florence a
grant of 100 florins, in return for which the notorious usurer was buried in state under
the steps of the high altar of Santa Maria Novella Church.
(10) . Some (but likely not all) of this difference may be explained by the lower default
risk attached to papal loans, which were usually secured by ecclesiastical tax proceeds.
Page 16 of 18

(11) . Lunt (1939: 472) claims that in such cases, borrowers paid the papal bankers sums
“that were equivalent to modern interest in all but name.” Other writers and documents
(Snape 1926: 103–104; Lunt 1934: 2:236–239, 257–259) suggest that those priests paying
servitia were often forced to borrow from the camera, or its bankers, at usurious rates.
(12) . A sign of the value of relics existed in the growing incidence of relic theft, some of
which occurred within the institutional church itself, as one church or monastery vied
against another. The Vatican looked the other way when a growing trade in Roman relics
from the catacombs benefited local merchants and customers; for the simple reason that
this active local trade presented the papacy with an advertising bonanza establishing
papal Rome as the center of Christianity (see Geary 1990). For a discussion of the role of
relics in saint veneration and the process of monopolization of the papacy over
canonization, see Barro, McCleary, and McQuoid, chapter 10 of this volume.
(13) . There are two ways to look at this, depending on the motives one is willing to
attribute to the Church. On one hand, the Church may have seen its supply of banking
services as a necessary cost of mobilizing its holy armies. On the other, the Church’s loan
activity may be seen as a low-risk way of sharing in the spoils of war.
(14) . According to Lunt (1934: 1:121): “the regular collectors of papal revenues usually
treated the money derived from crusading indulgences as they did any other which came
into their hands by reason of their office and assigned it to the papal camera…. Money
derived from the crusading indulgences thus flowed into the papal coffers from the
thirteenth century to the time of the protestant reformation. The volume of receipts
appears to have increased notably in the fifteenth century.”
Robert B. Ekelund, Jr.

Robert B. Ekelund, Jr. is Eminent Scholar (Emeritus) in the Department of Economics
at Auburn University.
Robert F. Hébert
Robert F. Hébert is Russell Foundation Professor Emeritus, Auburn University,
where he served on the faculty for more than two decades. He is a former Fulbright
scholar and past president of the History of Economics Society. He has authored or
coauthored more than 100 books, articles, and reviews. Retired, he now makes his
home in Baton Rouge, Louisiana.
Robert D. Tollison
Robert D. Tollison is Wilson Newman Professor and BB&T Senior Fellow in the
Department of Economics at Clemson University.
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The Political Economy of the Medieval Church

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By its nature, monopolistic behavior has important economic consequences. Social

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Accepting this premise, we offer an economic explanation of Church policy in several

2. Organization of the Medieval Church: A Contemporary

Demographic and technological considerations prevented the medieval Church from

Rather than distinguish its product by physical differentiation, as many contemporary M-

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3. Doing Good by Doing Well or Doing Well by Doing Good?

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4. Marriage: Sacrament or Contract?

Medieval monarchs and nobility customarily used marriages to consolidate and/or

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5. Capital Markets: Faith or Profit?

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(p. 313) 6. Crusades: Holy War or Market Retaliation?

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A prominent and telling example of how the Church behaved as a sophisticated

Technically, an indulgence provides remission of afterlife penalties imposed on sinners

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7. Purgatory, Indulgences, and the Protestant Reformation

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Ekelund, R. B., R. F. Hébert, R. D. Tollison, G. M. Anderson, and A. B. Davidson. 1996.

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(4) . The concept of an M-form corporation is commonly attributed to Oliver Williamson

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(6) . For other examples see Davidson and Ekelund (1997).

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Robert B. Ekelund, Jr.

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