The World’s First Liquidity Crisis


The in-laws arrive for sunday brunch….

Watching Secretary of the Treasury Timothy Geithner yesterday on CNN was a terrifying experience.

The depth of the current financial crisis is far more than a mere recession.

Trillions of dollars seem to have effectively disappeared.

This is bad.

Very bad.

It is a financial crisis of epic proportions, and I for one can only hope and pray the the people in Washington have the intelligence to figure this out before it is too late.

The first credit crisis did not resolve itself in so neat a fashion, and as Santayana says, ‘those who fail to learn from history are condemned to repeat it’.  In this case, I hope not.

In 1294, Europe experienced its first liquidity crisis, and one that has strong parallels to what we are experiencing today.

Credit, of course, in Medieval Europe was a relatively new phenomenon, as indeed was the entire concept of money.  In the early Middle Ages, relationships of any kind were largely barter, local and based on a Feudal land-driven hierarchy.  But by the early 13th Century, as Western European kings began to extend their military reach (including the Crusades) armies had to be paid.  In cash.  The more a King used his military, the greater his need for ready cash.

Christian restrictions on charging interest made cash a not so ready commodity, but there were sources in Europe. Greater inter-European trade had resulted in the use of forward contracts – credits for goods to be delivered.  And so there was indeed a credit market by the mid 1200s.  By the late 1200s, credit, at least to Kings, was relatively easy to come by, and all across Europe, monarchies were learning to fund their military adventures on debt, which was easier than endlessly raising taxes on their own inhabitants.

Then, as with all markets (seemingly), there came a crash.

In 1290, the Pope, hitherto a source of liquidity, called in all of his debts.  At the same time, the French King decided to levy a massive tax on the credit merchants.

In England, King Edward I, (pictured above), was engaged in war on two fronts:  Against the French. And now against the Scotts to the north who had rebelled against him and joined the French.  Ever see the movie Braveheart?  Yeah, Mel Gibson plays wonderful, brave and good looking William Wallace, who led the Scottish rebellion against the English.  Remember the crotchety old evil English King?  That was Edward I!

Full disclosure: which is what makes all this so uncomfortable.  Edward I, the evil King in the movie,  was also my wife’s great great great (many times over), grandfather.

In any event, Edward I now found himself committed to two wars at the same time, and with no access to credit what so ever.  It was a crisis of liquidity, just like now.

Edward, however, was no Barack Obama (to say the least).

He froze all the assets of the bankers in Britain (this is not too different from Britain freezing all the assets of Iceland last month when Iceland went effectively broke).

But then, instead of funding the bankers, Edward I took the rather unpleasant (from my perspective) step of seizing all their assets and then expelling all Jews from England.

There would be no Jews permitted in England until Cromwell allowed them back in in 1655.

As we say in Manhattan… oye.

Let us hope Mr. Obama has some better ideas.


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