Modern Finance in the Middle Ages? Advance contracts for the supply of wool
In 2004, Professors Adrian Bell and Chris Brooks, working with Dr Paul Dryburgh, were awarded £45,000 from the ESRC for a one-year research project to investigate the scale and scope of advance contracts for the sale of wool in the Middle Ages. The wool market was extremely important to the English medieval economy and wool dominated the English export trade from the late thirteenth century to its decline in the late fifteenth century. Wool was at the forefront of the establishment of England as a European political and economic power and it also attracted foreign capital investment into the country, including from Italian and French merchants eager to secure guaranteed supplies of wool by entering into advance contracts with major wool producers, most notably the great religious houses.
The project identified, transcribed and translated 228 advance contracts for the sale of wool from unpublished manuscript sources. The evidence from within these contracts has widened our historical understanding of the dimensions of the wool trade to all major monastic orders and a larger range of merchants from Southern France, the Low Countries and England.
The project included a detailed historical case study of the impact of entering into such agreements on medieval English monasteries based on the example of Pipewell Abbey in Northamptonshire. This experience of Pipewell demonstrates that the promise of ready cash for their most valuable commodity could led such abbots to make ambitious agreements, including taking on yet more debt to service existing creditors, and this led to their eventual bankruptcy. However, it also revealed that the merchants were prepared to restructure the original agreement to protect their investment and to maintain the future relationship.
The project also followed a unique interdisciplinary approach, employing practices from modern finance, to test the pricing methods and structures of these contracts in detail. It is widely believed by financial market practitioners that derivative instruments such as forward contracts and options are recent inventions. However an examination of the appropriate historical documents demonstrates the existence of quite sophisticated financial contracts much earlier. In medieval England, monasteries frequently sold their wool up to fifteen years in advance, to Italian merchants, for prices agreed on the date that the contract was signed. The discounts secured by the merchants on the spot price of the wool imply interest rates of between 20% and 27% APR. Analysis further demonstrated that this market was efficient.
Outputs to date
Adrian R. Bell, Chris Brooks and Paul Dryburgh, The English Wool Market, c.1230-1327 (Cambridge, 2007).
Adrian R. Bell, Chris Brooks and Paul Dryburgh, "Interest rates and efficiency in medieval wool forward contracts", Journal of Banking and Finance 31 (2007), 361-380.
Adrian R. Bell, Chris Brooks and Paul Dryburgh ''Leger est aprendre mes fort est arendre?: Wool, Debt, and the Dispersion of Pipewell Abbey (1288-1328).' Journal of Medieval History 32 (2006), 187-211.
Adrian R. Bell, Chris Brooks and Paul Dryburgh, Advance Contracts for the Sale of Wool c. 1265 - 1315, vol. 315, List and Index Society (2006)