The English Wool Market, c. 1230–1327 (review)

In the Middle Ages, English wool was a valuable commodity, particularly for Italian merchants. Merchants had long been in the habit of offering cash advances and long-term contracts to lay and monastic producers for the later supply of a certain quantity of wool at an agreed price. The fact that historians have been by turns overenthusiastic and inaccurate in classifying these contracts as futures or loans raises the question of how properly to describe them and—in a wider context—how financially sophisticated medieval merchants were. Did they invent derivatives like forward contracts and options centuries before their presumed, more recent development? Combining empirical historical research with modern financial research methods, the authors aim (1) to calculate the rates of interest charged on these contracts and determine whether they fell within the normal medieval range and (2) to find out whether the medieval wool market was efficient. These are difficult tasks, because the rate of interest was normally concealed in view of the Church’s prohibition of usury and because medieval price data are characteristically not accurate, robust, or dense: It is not normally clear what reported prices represent, whether they are comparable over time and space, and whether the gaps in the information vitiate the analysis.

In the first part of the book, the authors analyze the 200 forward contracts for wool—chiefly dating from 1270 to 1330—that they found in a variety of sources (Public Record Office; The National Archives, Kew, Richmond, Surrey; and the British Library).¹ They then identify the sellers (commonly monasteries, especially Cistercian) and buyers (mostly Italian and Cahorsin merchants) and analyze their motives. The monasteries were anxious to secure ready cash up front and a guaranteed cash flow for the life of the contract, and to protect themselves against the volatility of the wool spot market. The merchants were interested in securing an assured supply of high-quality wool over the long term and excluding their competitors. The authors discovered where (in London and at the various fairs), when (in relation to the date of advance payment), and by whom (monastic and merchant principals and agents) the contracts were negotiated, what penalty clauses were agreed in case of default, the mechanics of completing the contract (grading, packing, and delivering the wool), and what the factual consequences of default were for both parties (restructuring of the debt, often under royal pressure).

The following chapter highlights these issues in an in-depth study of the Cistercian abbey of Pipewell. The authors then apply modern financial research methods to the results of their empirical analysis, turning their attention initially to the determination of interest rates, which requires sophisticated and entirely plausible manipulation of the available price information. After surmising that the agreements in question were not futures, but were a cross between loans and forward contracts (130), the authors employ the formula for present-value calculation. Knowing the amount advanced (if it was the entire purchase price) and the spot prices for the life of the contract allows them to solve for the rate of interest hidden in the contract. Calculating both from the spot prices obtaining at the moment of the agreement and for each subsequent year of the life of the contract shows median interest rates of 22 percent and 18 percent, well within the normal medieval range. Next, they investigate the efficiency of the medieval wool market. In an efficiently functioning market, no information about a particular year’s spot prices or discount values should be able to predict the next year’s prices or discount. Despite the difficulties of the empirical evidence (which prohibit statistical analysis), the authors demonstrate that neither the amount of wool to be delivered nor the time span of the contract had any relationship to the size of the discount. Therefore, the “medieval wool markets were fairly efficient” (144).

This is a spectacularly successful investigation. The analysis is methodologically unassailable, and its conclusions are sound. Moreover, the book...