This is a really interesting paper, which is not something I ever expected to say about medieval finance. The basic thesis is...
This is a really interesting paper, which is not something I ever expected to say about medieval finance.
The basic thesis is this: usury was famously prohibited in medieval Catholic Europe. However, other financial contracts (that didn’t involve “barren money” bearing fruit) were not. In particular, in the northern Italian city-states, one could purchase equity by means of partnerships such as the “commenda” – this wasn’t usury, since it involved bearing some risk.
Another innovation, in 14th-century Genoa, was something like modern insurance, with “naked” policies unattached to loans or other contracts beginning to be written. This wasn’t usury, because no loans were made.
It didn’t take long for merchants to realize that they could offset equity risk by insuring themselves against losses. But the real innovation, sometime in the middle of the 15th century, was the ‘triple contract.” For a creditor, this consisted of a partnership; insurance of the principal against loss; and a third insurance-like contract selling an uncertain future profit for a small, certain profit. The genius of the triple contract is twofold: first, you can replicate the cash flows of a loan with interest, by combining non-usurious contracts. (This is, in all essential respects, just the statement of put-call parity: buying an asset, and buying a put option and selling a call option on the asset with the same strike price, gives you a constant payoff diagram. Hence the claim that parity was understood 500 years before it was officially recognized by academic finance.) Second, the creditor can make the individual contracts with different co-parties. A partner who did not want to borrow a loan could enter into a regular partnership, and the creditor could buy and sell insurance on the open market. This allowed triple contracts to become quite common – and made it difficult to argue that, since the payoffs replicated a loan, the triple contract was usury.
If that’s not enough for you, there’s also a brief (too-brief!) description of shady banking interests fighting to ensure that the triple contract was not declared usury by the Church. Plus ça change,
lifehack: if there’s a paper that looks interesting but you don’t feel like reading it, get prophecyformula to read it and give you the highlights
anyway, mostly reblogging this because inventing elaborate financial instruments to replicate loans with interest while avoiding breaking religious prohibitions on usury is so #the aesthetic