Saturday, August 4, 2012

Libor Scandal Is No Match for Its Medieval Precedent

Echoes: July 30
The Peasants' Revolt of 1381. Source: "Chronicles of Froissart," by Jean Froissart, 1388.

How timely!  Following my earlier posts on Greenspur and its bean-counters, here's extra food for thought drawn from real-world history.

(Reposted here from the article on

The financial news has recently been dominated by the scandal over the London interbank offered rate (known as Libor), with allegations that leading banks have manipulated a financial benchmark determining the interest rates charged to millions of borrowers and used in derivatives contracts worth hundreds of trillions of dollars.

The U.K. Parliament has become involved, grilling the former chief executive officer of Barclays Plc (BARC), Bob Diamond, over these events. But none of this is entirely without precedent. 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 transactions. 

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