Iberian colonies produced the vast majority of world precious metals in the Early Modern period, which increased liquidity in the Iberian Peninsula. The chapter focuses on the relationship between liquidity and financial development – including other relevant variables such as instruments and institutions – to examine the efficiency of the financial systems in Castile and Portugal. Public credit, debt management and the cost of public debt service are considered, as well as private debt, the diversity of financial instruments and the cost of capital. Finally, the authors compile their perspective on the main similarities and differences in the development of the financial systems of Castile and Portugal.

We divide this chapter into four sections. The first section outlines the taxonomy of commodity-based monetary regimes in Europe and their advantages and costs. The second section describes the main international monetary flows in the early modern period and relates them to East-West balance-of-trade adjustments and monetary systems in Asia (1700–1800). In the third section, we turn to the development of the foreign exchange market, which was mostly based on bills of exchange in this period. We explain the expansion of the bills-of-exchange market from the European to the intercontinental network in the mid-nineteenth century. The final section then investigates how nominal exchange rates and relative prices contributed to the global current account adjustments in the near pre-gold standard period (1820s–1870s).

In our opening quotation, Fernand Braudel likens the development of early modern capitalism to a process occurring inside a “bell jar:” insulated from the rest of the economy and unable to expand to the whole society. The key question for him was to understand why, although the main elements of modern capitalism were already present in the Commercial Revolution, it took so long, until the Industrial Revolution, for capitalism to “conquer” society, and become the dominant organizational mode in the West.

Braudel's puzzle has much relevance for modern development economists. Recently, Hernando de Soto suggested that the bell jar metaphor fairly characterizes today's global financial system. During the past twenty-five years, he argues, many countries have formally opened up to global capital flows, but we still need to see the extreme efficiency displayed by New York's sophisticated financial markets benefit the poor rural areas of Peru, Niger, or India, where credit markets are shallow and interest rates remain high. The implication is that capitalism may thrive in certain areas without inducing rapid progress in other areas. This “Braudelian” puzzle is called by de Soto the “mystery of capital.”