In case you thought this is just a 2007 crisis issue, think again.
Adrian Bell, Chris Brooks and Tony Moore of University of Reading have been working on a project called Medieval Foreign Exchange.
In this article they discuss some findings and show how a variant of LIBOR crisis occurred in 14th century:
A new study of the foreign-exchange market in the Middle Ages, conducted by the University of Reading’s ICMA Centre, has documented a medieval system of exchange-rate manipulation similar to today’s.
That system also led to public outcry, a parliamentary investigation and the impeachment of a famous financier.
A major aim of financial innovation throughout history has been to circumvent regulations and restrictions placed on the industry. In the Middle Ages, an important obstacle was the religious disapproval of usury — the charging of interest or “making money from money.” Dante condemned the usurer to the lowest level of the seventh circle of Hell. To avoid the “taint of usury,” medieval financiers developed various methods of disguising interest within other.
So how was rigging done? By artificially increasing prices for financial products:
The simplest method was for the borrower to recognize a debt of 15 pounds when he had borrowed only 10, the 5 pound difference being the lender’s profit. Or the borrower could pay the lender a “voluntary” gift on top of the principal. Alternatively, the lender could impose a penalty in case of “late” repayment, where the loan was deliberately intended to be repaid late.
Another medieval practice that might resonate today was “chevisance,” or in modern parlance, a repurchase arrangement. Here, a borrower would sell goods to the lender at one price with the understanding that the borrower would buy them back at a higher price. This is similar to our contemporary repo market, which underpins the shadow banking system.
Perhaps the most sophisticated method of disguising usury involved foreign-exchange transactions. The pound sterling, for example, was always valued higher in Venice than in London. These differentials (or spreads) enabled bankers to profit by moving money from one place to another and back.
To produce and maintain these spreads, however, required systematic “rigging” of exchange rates across Europe. In essence, banks and currency brokers in London always had to deduct a few pence from the rate with Venice, and their counterparts in Venice had to add a few pence.
It led to a huge public outcry then and led to a revolt. Will it lead to a similar revolt now?
Although certain forms of financial engineering play a vital role within the economic system, when viewed from outside, they may seem amoral or even illegal. In this way, revelations about the hiding of usury in the Middle Ages or the fixing of Libor both reflect and contribute to a wider public suspicion of finance. It is particularly dangerous when such financial scandals coincide with periods of wider economic and political uncertainty, as in the 1370s and today.
The question now is whether public outrage at the Libor scandal and other financial misdeeds will lead to fundamental reforms of the financial sector — such as the separation of retail and investment banking or legislation to regulate the “bonus culture” — or just more cosmetic changes that fail to address the structural issues.
Will we have to wait for a 21st century peasants’ revolt before seeing any real change
Fascinating history as it is mostly the case…