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The credit crunch of 1294
via FT alphaville
original paper here
Excerpts from the paper:
via FT alphaville
original paper here
Excerpts from the paper:
From 1275, the Ricciardi collected the newly-created customs duty on exports of wool, hides and wool-fells, worth around £10,000 per year, as well as receiving money from other sources of royal revenue. In return, they advanced significant sums in cash to the king and made payments to third parties on the king’s behalf, as and when ordered by royal letters. In total, between 1272 and 1294, the Ricciardi were involved in the collection and disbursement of around £20,000 per year, equivalent to roughly half of the king’s ordinary annual income. We could perhaps compare this arrangement to a modern current account, complete with extensive overdraft facilities (interestingly, Edward was usually overdrawn by £10,000-£20,000).
...
The trigger for the global credit crunch starting in 2007 has been traced to the ’sub-prime crisis in the US, as the resulting uncertainty meant that banks were unwilling to lend to each other, thus removing liquidity from the market. In the early 1290s, there was a similar crisis of liquidity, as the papal tax discussed above was gradually called in by the pope and the French king exacted large sums from the Italian merchants in his kingdom, leaving the merchant societies under-capitalised.
Initially, it seemed as though the Ricciardi may have been escaped the worst of this. In 1290, Edward had finally agreed terms with the pope to lead a new crusade and, in return, was granted access to the proceeds from clerical taxation in England. As a result, the merchant societies with whom the tax had been deposited were ordered to deliver a first instalment of 100,000 marks (£66,667) to the Ricciardi on Edward’s behalf (see Lunt (1939) and Kaeuper (1973).
It is unlikely, however, that any money physically changed hands, since it would have been more logical for the merchant societies simply to transfer their liabilities from the pope to the Ricciardi. On paper, the Ricciardi would have been credited with the extra money, but there was a corresponding danger should Edward seek to withdraw this tax revenue at short notice.
Unfortunately, this was precisely the situation that arose in 1294, when war broke out between England and France. As he had before, Edward turned to the Ricciardi for money to fund his armies. Although, in theory, the Ricciardi should have been well-capitalised, it seems that, in reality, the greater part of their resources was tied up and, fatally, the wider lack of liquidity meant that they could not raise money on the interbank market. These difficulties were exacerbated by the Anglo-French war, which effectively cut communications between Italy and England and left the merchant societies unable to update the account books of their various branches across Europe.
In response, Edward removed the Ricciardi from their position as collectors of the wool custom and ordered the seizure of the assets (mainly wool but also loans to private individuals) held by the Ricciardi and other merchant societies. This dealt a mortal blow to the Ricciardi’s finances and effectively marked the end of their long-standing relationship with the English crown.
The Ricciardi initially sought to recover their position through a series of ‘credit swaps’ and netting between their creditors and debtors (Kaeuper 1973).1 They requested a new accounting with Edward, in the belief that his ‘overdraft’, combined with the proceeds of the confiscated wool and debts, would offset most of the outstanding papal tax. Their other main creditor was the pope, and the merchants tried to persuade him to take over the debts owed to them in France and in Italy, on which he was better-placed to collect. To draw another parallel with more recent events, we can compare this to government intervention, exchanging Treasury-backed bonds for the more illiquid assets held by the banks.
Without guarantees, the Ricciardi were naturally driven out of business — something that ended up not being good for anyone, especially Edward I:
In the short term, Edward’s decisive actions succeeded in recovering around £50,000 from the Ricciardi. However, the fall of the Ricciardi had significant costs in the medium-term, since Edward still needed to raise huge sums of money to pay for his armies, now fighting in Gascony, Scotland and Wales, as well as the subsidies that he had promised to his allies in the Low Countries and Germany. As a result, Edward was forced to turn to moneylenders who both lacked the resources of the Ricciardi and charged much higher rates of interest (we have found examples of annual rates at 40% and 150%) (Bell, Brooks and Moore (2009).
Furthermore, deprived of access to credit, Edward was forced to rely on heavy taxation and his prerogative rights of purveyance and prise (compulsory purchases of goods). He also over-issued wardrobe bills (essentially government IOUs) to pay for wages and supplies.
All of these measures aroused political opposition in England, and contributed to a major constitutional crisis in 1297 (Prestwich 1988).
...
The trigger for the global credit crunch starting in 2007 has been traced to the ’sub-prime crisis in the US, as the resulting uncertainty meant that banks were unwilling to lend to each other, thus removing liquidity from the market. In the early 1290s, there was a similar crisis of liquidity, as the papal tax discussed above was gradually called in by the pope and the French king exacted large sums from the Italian merchants in his kingdom, leaving the merchant societies under-capitalised.
Initially, it seemed as though the Ricciardi may have been escaped the worst of this. In 1290, Edward had finally agreed terms with the pope to lead a new crusade and, in return, was granted access to the proceeds from clerical taxation in England. As a result, the merchant societies with whom the tax had been deposited were ordered to deliver a first instalment of 100,000 marks (£66,667) to the Ricciardi on Edward’s behalf (see Lunt (1939) and Kaeuper (1973).
It is unlikely, however, that any money physically changed hands, since it would have been more logical for the merchant societies simply to transfer their liabilities from the pope to the Ricciardi. On paper, the Ricciardi would have been credited with the extra money, but there was a corresponding danger should Edward seek to withdraw this tax revenue at short notice.
Unfortunately, this was precisely the situation that arose in 1294, when war broke out between England and France. As he had before, Edward turned to the Ricciardi for money to fund his armies. Although, in theory, the Ricciardi should have been well-capitalised, it seems that, in reality, the greater part of their resources was tied up and, fatally, the wider lack of liquidity meant that they could not raise money on the interbank market. These difficulties were exacerbated by the Anglo-French war, which effectively cut communications between Italy and England and left the merchant societies unable to update the account books of their various branches across Europe.
In response, Edward removed the Ricciardi from their position as collectors of the wool custom and ordered the seizure of the assets (mainly wool but also loans to private individuals) held by the Ricciardi and other merchant societies. This dealt a mortal blow to the Ricciardi’s finances and effectively marked the end of their long-standing relationship with the English crown.
The Ricciardi initially sought to recover their position through a series of ‘credit swaps’ and netting between their creditors and debtors (Kaeuper 1973).1 They requested a new accounting with Edward, in the belief that his ‘overdraft’, combined with the proceeds of the confiscated wool and debts, would offset most of the outstanding papal tax. Their other main creditor was the pope, and the merchants tried to persuade him to take over the debts owed to them in France and in Italy, on which he was better-placed to collect. To draw another parallel with more recent events, we can compare this to government intervention, exchanging Treasury-backed bonds for the more illiquid assets held by the banks.
Without guarantees, the Ricciardi were naturally driven out of business — something that ended up not being good for anyone, especially Edward I:
In the short term, Edward’s decisive actions succeeded in recovering around £50,000 from the Ricciardi. However, the fall of the Ricciardi had significant costs in the medium-term, since Edward still needed to raise huge sums of money to pay for his armies, now fighting in Gascony, Scotland and Wales, as well as the subsidies that he had promised to his allies in the Low Countries and Germany. As a result, Edward was forced to turn to moneylenders who both lacked the resources of the Ricciardi and charged much higher rates of interest (we have found examples of annual rates at 40% and 150%) (Bell, Brooks and Moore (2009).
Furthermore, deprived of access to credit, Edward was forced to rely on heavy taxation and his prerogative rights of purveyance and prise (compulsory purchases of goods). He also over-issued wardrobe bills (essentially government IOUs) to pay for wages and supplies.
All of these measures aroused political opposition in England, and contributed to a major constitutional crisis in 1297 (Prestwich 1988).
It took off like hot cakes a couple centuries later...
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