Page last updated at 01:34 GMT, Friday, 26 December 2008

A medieval take on financial woe

By Chris Bowlby
BBC News

King Edward I, pictured at Westminster Abbey
Edward I would see many parallels between his economic travails and ours

Hear the phrase "medieval credit crunch" and you might think of a row about peasants not being paid or a local merchants running out of gold coins.

But an unusual new research project at Reading University reveals that the medieval economy was a lot more sophisticated than we might think, with international crises to match ours today.

And one of its principal victims, the English King Edward I, would have clear views on how Gordon Brown should be handling things now.

The Reading team of Dr Adrian R Bell, Professor Chris Brooks, and Dr Tony Moore has studied trading involving monks and monarchs as well as bankers.


As early as the thirteenth century, innovative practices had been developed to deal with unpredictable and unreliable cash flows experienced by large institutions and governments.

Interest could not be charged directly on loans, because of religious restrictions on charging interest.

Dr Tony Moore (l), Professor Chris Brooks (c) and Dr Adrian Bell (r) from Reading University
Edward dealt with his Italian bankers "immediately, unilaterally and without sympathy"
So forward contracts were used in the wool market between monasteries in England and Italian merchant societies, where cash loans would be repaid in wool.

Religious communities also pioneered their own pension schemes.

At the heart of the new medieval financial industry was merchant banking, including government finance.

Edward I had an early form of current account with the Ricciardi of Lucca that incorporated an extensive overdraft facility, so he could fund the armies and castles that helped conquer Wales.

To meet Edward's demands, the Ricciardi could raise additional funds from other merchant societies across Europe, in the same way as modern banks turn to the interbank lending markets.


"All this demonstrates", says the Reading team, "that medieval merchants, using abaci and roman numerals, were just as capable of calculating forward prices and interest as modern financiers using mathematical models and computer spreadsheets".

But this system could be thrown into disarray by credit crunches like one in 1294, which "shares remarkable parallels with today's difficulties - the main cause being a lack of liquidity in the money market".

BBC History Magazine
What can history teach us about the credit crunch? is in the January issue of BBC History Magazine
On sale 30 December, 2008

After a period of easy money in the 1280s, major financial players including the Pope called in their money, the French king levied a huge tax on the Italian merchants in France, and war broke out between England and France in 1294.

So when Edward I called on his bankers to raise the money needed to fund his armies, the Ricciardi were caught unprepared. Normal markets and communications seized up in the crisis conditions.

"It seems that money has disappeared" said the Ricciardi, just like a modern banker complaining that everyone has stopped lending.

When the Ricciardi could not come up with the money, Edward in effect froze all of their assets in England, and did the same to all other Italian merchant societies.

As the Reading team put it, Edward dealt with his Italian bankers "immediately, unilaterally and without sympathy".

The Ricciardi were in effect bankrupted by the crisis of 1294, and they were followed by a string of other leading banks.


So if Edward I faced today's crisis, what might he do?

His initial advice in today's crisis, the Reading researchers suggest, "would probably be to place senior executives under house arrest - most likely without trial, until the government could recover as much as possible from their assets and estates".

But the King known as the "hammer of the Scots" could not afford simply to become the hammer of every banker.

He soon realised that he would need new sources of finance in the future.

Edward may indeed have regretted allowing the Ricciardi to fail. During the war of 1294-7, he was forced to turn to moneylenders who both lacked the resources of the Italians and charged much higher rates of interest.

And he did pay huge compensation to the Ricciardi's successors as royal bankers when they complained that he had caused a run on their bank.

So whatever the frustrations during a credit crunch, Edward might have counselled that some leniency towards bankers is justified.

However tempting a political target bankers may make during a crisis, medieval as well as modern rulers know they will still need financial friends for the future.

What can history teach us about the credit crunch? will be published in the January issue of BBC History Magazine, on sale 30 December, 2008.

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