Research by Dr Adrian R Bell, Professor Chris Brooks and Dr Tony Moore at the University of Reading’s ICMA Centre has established clear parallels between the events of King Edward I’s time in the late 13th century and today’s credit crunch.
Dr Adrian Bell, Senior Lecturer in the History of Finance at the ICMA Centre at the University of Reading, said:” It is widely believed that the current credit squeeze, leading to bank failures, is a modern phenomenon arising from the interplay of a historically unique set of circumstances that could not have been foreseen. However, events 700 years ago, starting in 1294, sound very much like today’s headlines. They included a sub-prime borrower, liquidity disappearing, recriminations, the seizure of foreign owned assets and runs on the bank.”
In the 1280s, the Italian merchant societies, the forerunners of today’s investment banks, were awash with money as they managed large sums of collected taxes for the Pope and the English king, as well as holding deposits from wealthy individuals. However, in the early 1290s, the Pope called in much of his money and the French king levied a huge tax on the Italian merchants in France. The final straw was the unexpected outbreak of war between England and France in 1294. Edward I, the then king of England, called on his bankers to raise the money needed to fund his armies. Unfortunately for the bank (the Ricciardi), their assets were tied up in loans and trade.
In normal times, the Ricciardi would have sought to raise short-term loans from their fellow merchants, but in 1294, like today, the interbank markets were frozen. The resultant uncertainty, combined with the fear that Edward (the medieval equivalent of a sub-prime borrower) would default on his debts, meant that the merchant societies were unwilling to lend to each other.
The bankers’ own comments are strikingly similar to those heard today: in 1294, the Ricciardi said that ‘it seems that money has disappeared’; ‘everyone to whom we owed money ran to us and wanted to be paid’; ‘where we used to have credit and could borrow 100,000 and 200,000 livres tournois (£25,000-50,000) and even more, we are now reduced to such a point that if we wanted 100 livres tournois (£25) we could not find them.’
As a result, the Ricciardi were unable to provide Edward with the funds he needed and his response was to seize all their assets in England, effectively bankrupting the society. The Frescobaldi of Florence, Edward I’s next bankers, also came to regret taking him on as a client, claiming that their existing customers had lost confidence in them as a direct result of their relationship with him. Customers withdrew their cash deposits, perhaps fearing that their entanglement with Edward had put their savings at risk, precipitating a run on the bank. Edward, like the current British Government, recognised the gravity of the situation and promised them £10,000 in compensation to keep them solvent.
Dr Bell continued: “It should be noted that the medieval economy was much less dependent on credit and banking than our modern economy. However, had Edward I faced today’s crisis, initially, he would probably have placed senior executives under house arrest, most likely without trial, until the Government could recover as much as possible from their assets and estates. However, in his case he also subsequently realised that he would need new sources of finance and so whatever the frustrations, he might also have counselled some leniency. In the 13th century, banks were allowed to fail and other banks also failed as a result. However, within a few years, other banks had grown to take their place and the banking sector and the economy recovered.”
More information at www.icmacentre.ac.uk/medievalcredit
Further articles can be seen at:
Notes to editors:
Interviews with Dr Adrian Bell and documentary images of letters between the Frescobaldi of Florence and Edward I are available on 0118 378 7388
Dr Adrian Bell, Professor Chris Brooks and Dr Tony Moore were awarded a research grant – worth just over £350,000 – by the Economic and Social Research Council to fund a 3-year project entitled ‘Credit Finance in the Middle Ages: Loans to the English Crown c. 1272-1340.’ The outputs from this project include forthcoming papers in The Historian (the magazine of the Historical Society) and BBC History Magazine, describing the credit crunch of 1294 in more detail.
More information about ICMA and the ICMA Centre:
The International Capital Market Association (ICMA) is the self-regulatory organisation and trade association for the international securities market. Its primary role is to oversee the fast-changing marketplace through the issuing of rules and recommendations relating to trading and settlement practices. ICMA currently has over 400 members in almost 50 countries and has a proven track record in representing their interests. In addition to its regulatory role, ICMA also provides its member firms – and other users – with a range of services, products and support. The ICMA Centre is supported by ICMA and is part of the Henley Business School, University of Reading.
More about the Economic and Social Research Council:
The Economic and Social Research Council (ESRC) funds research and training in social and economic issues. It is an independent organisation, established by Royal Charter, but receives most of its funding through the Department for Innovation, Universities and Skills. Its budget of £181 million (2007/2008) funds more than 2,500 researchers in academic institutions and policy research institutes throughout the UK. It also supports more than 2,000 postgraduate students.