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Lessons from history: Pipewell

07 September 2016

Jonathan Marriott - Chief Investment Officer

They speculated on the futures market, borrowed against unrealistic profit expectations first from bankers in France and then Italy. They held an extravagant party to mark the opening of their new building with celebrity guests. When it all went wrong they fell back on state aid. Sounds like recent history, but from a date point of view this is closer to “Robin Hood” than “Wolf of Wall St”.

In the thirteenth century English wool was much prized across Europe and wool produced by the Cistercian abbeys was considered of the highest quality. The Abbey of Pipewell in the centre of England was one such producer. In 1288, with demand strong they looked to expand their flock of sheep. To fund this they approached traders in Cahors on southwest France. They agreed to sell their entire production for the next fifteen years and in return borrowed money to substantially expand the flock. Initially all went well and the friars enjoyed a period of prosperity.

However keeping livestock was precarious with the threat of disease ever present. The English King was having problem with rebellious Scots lead by William Wallace of “Braveheart” fame. What made matters worse for the monks was that the French were allied with the Scots.

Over time the King banned French traders, the flocks were devastated by disease and the king raised tax on exports. This made life difficult but undeterred they were determined to continue to expand. The monks provided extra wool and coats to keep the bankers happy.

They grew the flock but also expanded their facilities, building a substantial New Abbey. To celebrate the dedication of the new buildings they threw a lavish party with the Earl of Lancaster heading the huge guest list. Twenty years later the Abbot observed that “no one knew how much they spent that day”.

When disease struck again the abbey fell behind on its deliveries of wool. The Cahors bankers had sold the debt on to other bankers and the Bardi, bankers from Florence, agreed to lend them money to fill the gap. Further debt was taken on to meet the obligations from previous loans and the Abbey had to sell assets to meet these obligations. When they finally ran out of money, in 1322, the King took the Abbey into his protection. The monks were left begging for food and regretting that they had ever had dealings with bankers.

A tale of excess and profligacy, borrowing on borrowing ending in a state bail out sounds only too familiar to us today. We need to learn from history that borrowing to grow is not the solution, just postpones the inevitable, and that we need to be prepared to stand unexpected shocks. I, for one, am not sure the lessons of the 13th century have been learnt.