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Inventing a secondary market for sovereign debt in later medieval England

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The modern sovereign debt markets are a key component of the global financial system and global sovereign debt issuance for 2012 may exceed $7 trillion. A major attraction of sovereign debt for investors is the flexibility to buy and sell on an extensive and liquid secondary market. Although not comparable to their modern counterparts in scale or complexity, recent historiography has emphasised the relative sophistication of medieval financial markets. For example, shares in the sovereign debt (monti) of the financially-precocious Italian city states of Florence, Genoa and Venice were traded on a remarkably open and transparent secondary market. The situation in England was less clear-cut, however, largely because of the variety of ways that the English kings could issue debt and how these were subsequently recorded by the Exchequer. The first part of this paper will describe the different classes of English sovereign debt instrument and set out the evidence for their trading on a secondary market, albeit opaque and OTC . It will concentrate on the key period between 1250 and 1350 when recurrent financial crises, largely driven by military expenditures, led to an explosion in outstanding government debt. This, in turn, stimulated innovations in the trading of such debt. In the 1340s, indeed, the purchase by leading royal financiers of wardrobe debentures and the infamous Dordrecht bonds from less well-connected royal creditors formed an integral part of the royal financial system. Edmund Fryde has estimated that as much as £84,000-worth of distressed debt was redeemed in this way between 1343 and 1355.

It is clear that the various debt instruments issued by the English kings were routinely bought and sold at a discount. Unfortunately most of this evidence for this is anecdotal or tangential in nature and omits key information. Under the system of single-entry or charge-discharge accounting used by the medieval Exchequer, for instance, when a bond or tally purchased at a discount was presented to the issuer for redemption, it was entered in the accounts at par value. This makes detailed financial analysis of these transactions problematic. However, there are a small number of cases that do provide with the necessary data. Occasionally the English kings themselves engaged in buying up their own debts at a discount, which was described as a remissio (remittance or release) in the royal accounts. It took two main forms: first, a royal creditor could release or quitclaim a portion of the total debt owed to him in return for speedier repayment of the remainder; and second, a holder of a royal money fief (effectively an annuity) could release that fief to the king (often with accumulated arrears) in return for a lump-sum payment. The second part of this paper will analyse these remissiones, with the aim of calculating the implicit discounts at which the English kings bought up their own debt and examining what factors may have determined these discounts.

This talk is part of the Financial History Seminar series.

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