Gold News

Great Defaults from History, Part 372: The English Experience c.1300

Money, once dear to bankrupt kings, is now at 3.5% for 30 years...

AND SO in 1294, English king Edward I fell out with Philip IV of France – to whom he owed loyalty by dint of also being the Duke of Aquitaine – after English pirates had attacked French ships and sacked the French port of La Rochelle, writes Adrian Ash at BullionVault.

Long known for enjoying a good scrap himself (Edward rebelled against his father at age 20, then swapped sides, then pillaged the Near East on a crusade, and then tore through Wales before earning the nick-name "Hammer of the Scots"), he fast made alliances with France's other enemies, and began raising money for war.

Step forward the Riccardi bankers of Lucca in Tuscany, Italy – who also happened to have major interests in France. Understandably irked at seeing these Italian bankers finance his enemy, King Philip seized the Riccardi's assets in France, sparking a banking run by their creditors in Italy, which meant they couldn't lend anything to Edward in England.

So the English crown moved on to borrowing from the Frescobaldi of Florence (expelled from England – and thus suffering default – by Edward's son, the imaginatively titled Edward II, in 1311) before moving on again to the Bardi and Peruzzi families, already the key financiers to royalty in mainland Europe.

Opening offices in London, these Florentine bankers enjoyed two decades of high interest payments, plus trading profits on the English wool duties they managed for the crown. All told, on one modern estimate, the aggressive "conditionalities" of their loans meant they had seized and looted very nearly enough to cover the official outstanding debt of some £150,000 by the time Edward II defaulted in 1340 (he owed 10 times his annual revenues), helping take the Peruzzi down in 1343. The Bardi followed in 1346, worsening what one historian has called the first international debt crisis.

So what? Lovers of analogy will love this. Because in an overly-simplified way, "The paradigm may run as follows," wrote Carlo Cipolla in The Monetary Policy of Fourteenth-Century Florence (as quoted here by James McDonald in A Free Nation Deep in Debt)...

"The large companies of the dominant economy (Florence), which operate in the under-developed country (England), have a vital interest in securing the local raw material (wool) for the home market. By logic of events they are led to grant increasingly larger credits to the local rulers, on whose benevolence the licenses for the export of raw material ultimately depend. The rulers of the under-developed country, however, instead of using the credit to finance productive investment, squander the funds...and are soon forced to declare bankruptcy."

According to Cipolla – writing 20 years ago – the paradigm "could be applied to the events of the 1970s." The emerging-markets crisis of 1982 rings a bell too. A certain debt blow-up in south-eastern Europe this week looks equally fitting.

Difference is, medieval kings had such a poor rep', they were regularly charged 40% per annum on their loans. Whereas Greece – although insolvent, and now in default – is getting three-decade money from its Eurozone partners at just 3.5% pa. Yes, Greece's private-sector lenders (meaning Greek and of course foreign bankers) are being offered more than 6%, but only if they take a one-fifth loss on their capital first. And Ireland and Portugal, also unable to borrow anywhere else, are also getting 3.5% money from foreign taxpayers to cover their outstanding debts for the next 30 years.

Money has never been offered so cheaply in history. We doubt it will prove very valuable.

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Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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