Today's risk is not a peasants' revolt, but a sovereign default

History teaches us that heavily indebted sovereigns will default, whether they are medieval English kings or 21st-century European governments

PUBLISHED : Wednesday, 24 July, 2013, 12:00am
UPDATED : Wednesday, 24 July, 2013, 3:33am

Stephen King, the group chief economist at HSBC, believes his profession has spent far too much time developing mathematical models of how markets work.

If economists really want to understand today's world, he argues, they should read history instead.

One episode from the past King believes would repay closer study is England's Peasants' Revolt of 1381, when mobs of angry agricultural labourers marched on London demanding an end to serfdom and the repeal of oppressive tax laws.

In his new book When the money runs out: the end of Western affluence, King argues that the revolt was caused by the failure of England's ruling classes - the monarchy, the church and the land-owning nobility - to appreciate that the structure of the country's economy had been fundamentally changed by a major disaster: in this case the Black Death.

Caused by the bacterium Yersinia pestis, the Black Death swept into Europe from China in the mid-14th century, wiping out somewhere between a third and a half of England's population.

The result was an acute labour shortage which threatened to shift the balance of economic power from the land-owners to their workers.

Naturally enough, the ruling classes resented the change, and passed harsh laws to restrict labour mobility and hold down wages. "It was," writes King, "an early form of austerity."

The last straw came when the government of boy-king Richard II imposed a swingeing poll tax on the peasantry to fund its prosecution of the Hundred Years War against France. Columns of irate farm-workers converged on the capital, where they captured the Tower of London, beheaded the finance minister (and the Archbishop of Canterbury) and indulged in an orgy of looting and arson.

King sees direct parallels with the recent riots in Spain and Greece. Then as now "the existing political systems were unable easily to adjust to a new and poorly understood economic reality". By pursuing austerity, he suggests, pig-headed European governments risk a wider and more violent uprising.

It's hard to know what to make of this. After all, the Peasants' Revolt was quelled when the 14-year-old Richard II rode out alone to parley with the mob, promising he would meet their demands.

The rebels duly dispersed, whereupon Richard ruthlessly hunted down and executed their ringleaders, ordering them publicly disembowelled. England's restrictive labour laws remained in place.

It doesn't seem a terribly helpful lesson for today's economists.

If they really want to learn some useful medieval history, economists should go back 40 years to the reign of Richard's grandfather Edward III.

Edward took a robust view of his kingship, believing without question that he was anointed by God to rule, and to wage war - especially against the French.

In 1337, at the age of 25, he declared himself the true king of France and launched an invasion to recover what he saw as his rightful crown.

As a military leader, Edward was initially successful. He crossed the Channel, destroying the French navy in the process, defeated the flower of French chivalry at the battle of Crécy and captured the port city of Calais.

His son, the Black Prince, went on to crush another French army at Poitiers, even capturing the French king, for whom he demanded a massive ransom of 4 million gold écu coins.

Unfortunately, however, all this military adventurism was ruinously expensive, and Edward was forced to borrow heavily from the Italian bankers of Florence, the leading international financial centre of the day.

To fund his campaigns, Edward borrowed 900,000 gold florins from the Bardi banking family, and a further 600,000 from the Peruzzi - a vast sum.

Then, when his war with France got bogged down, in January 1345 Edward defaulted on his debts.

As hedge fund manager David Harding writes in his history of speculative follies, both the Bardi and the Peruzzi banks collapsed, "sending shockwaves around Europe and dragging scores of other banks down with them. Credit dried up, unemployment leapt and depression ensued."

And there's the lesson: when the going gets tough, deeply indebted sovereigns always default. It applies to the governments of today just as much as it did to English kings 700 years ago.

Sure, the debt-laden governments of Europe, the United States and Japan may not actually fail to repay their bond-holders.

Instead they are likely either to renege on promised pension payments, trigger sky-high inflation to cut the real size of their debts, or devalue their currencies to skewer foreign creditors.

Either way, the result amounts to a default. It's happened many times before, and history teaches us it is going to happen again.