(Bloomberg Opinion) -- We may live in a frenetic age of diminished attention spans and 24-hour news cycles, but when it comes to the debt markets, investors are increasingly taking the long view. In the past few years, governments, corporations, and even universities have issued bonds that won’t come due for fifty or even a hundred years.
Why stop there? Why not issue bonds that never, ever mature? It may sound absurd, but debt without a fixed maturity date is the historical bedrock of the modern financial system. While borrowers on the margins still use them today, perhaps it’s time for even the most credit-worthy borrowers to bring them back.
Perpetual debt can be dated back to the eighth century, when the Carolingians ruled Europe. In order to encourage the bequest of land to monasteries, the Catholic church promised to pay donors a modest annual sum that reflected the value of renting land. This annuity was called a rente, and it would often run in perpetuity, passing from the donor to his or her heirs and assignees.
These contracts inspired a new idea. Merchants and financiers approached small, cash-strapped landowners, offering to supply capital in return for a small cut of future proceeds in perpetuity. If the landowner failed to make payments, the rente holder could claim the collateral (the underlying land). In effect, what began as a means of helping the church morphed into a way to invest in agriculture.
Then the rente became far more important. Once again, the church played a key role. As the economic historian John Munro has observed, the rente’s metamorphosis from obscure agricultural contract to the ur-instrument of modern finance began when the Pope launched a crackdown on usury.
Church leaders, eager to make their point, began pulling quotes from the Bible. The Book of Ezekiel, for example, told of a man who “lends at interest and takes a profit.” It then asked: “Will such a man live? He will not. Because he has done all these detestable things, he is to be put to death.”
Oh dear. That message, amplified in the various Lateran Councils of the twelfth and thirteenth centuries, included attacks on Jewish money lenders, edicts denying Christian burial to usurers, and other, um, disincentives to lend money at interest. Dante did his part, too: His Inferno relegates usurers to the very bottom of the seventh circle of hell – lower than murderers, blasphemers and sodomites.
It is perhaps not surprising, then, that cash-strapped municipalities in France decided to find a way around the prohibition on usury. And here the rente offered a model. Towns sold rente contracts to investors backed by revenue from rents or excise taxes on various foodstuffs. The idea soon spread to other municipalities in Europe.
In the process, the issuers of the new contracts saved their souls (and skins). They could rightly claim that they weren’t actually borrowing money because there was no principal to be repaid. It was just a stream of annual payments that stretched into eternity as unfathomable as an afterlife spent in heaven or hell.
There was an additional advantage to bonds that last forever. In an age when the church launched a holy war on usury, many debtors managed to get their interest-bearing debts canceled by claiming there was no other way to avoid becoming entangled in the damning sin of usury – surely one of the more creative justifications for debt default ever invented. Rente contracts insured that borrowers wouldn’t renege.
As a growing number of municipalities embraced rente as a form of public finance, they became increasingly sophisticated. In medieval Catalonia, for example, town authorities sold censals (their version of a rente) in two forms: a perpetual, hereditary annuity that paid 7.14% interest, and another annuity that ran for “two lives” before expiring.
National governments also experimented with the perpetual rente system, with mixed results. France and Spain both embraced the idea, but often abused it, forcing holders of short-term bonds to exchange their securities for annual payments in perpetuity. Nonetheless, by the sixteenth century, these instruments were bought and sold in secondary markets across the continent, becoming the stock in trade of many early merchant-banking houses.
To our modern eyes, this is a strange and alien way to do business. But perpetual bonds invariably contained a provision that allowed the issuer to redeem the debt at their convenience. In other words, the rente was callable: If the debtor government could find a cheaper way of borrowing money, it could discharge its obligations and issue new perpetual obligations at the lower rate.
It was in England that the perpetual bond achieved its greatest success. Though the country had gone Protestant under Henry VIII, the Protestants weren’t so fond of usury, either. In 1552, Parliament reinstated prohibitions on lending money at interest, declaring: “Forasmuche as Usurie is by the worde of God utterly prohibited, as a vyce moste odious and detestable.”
In subsequent years, hostility toward usury softened. But the British remained quite skeptical, capping legal interest rates at 10 percent in 1623, and then at 5 percent by 1713.
This may help explain why, when Britain had to borrow money at 14% interest to finance a war with France in 1693, it opted for perpetual bonds. Indeed, most historians date the country’s “financial revolution” to that year, when it issued a “Million Pound Loan.” But this wasn’t really a loan; it was an annuity – otherwise known as a perpetual bond.
The creation of the Bank of England the following year led to a wider array of offerings, though some of these weren’t perpetual. One ran for three lives (at 14% interest); two lives (12%); and one life (10%).
In 1752, though, the British converted the bonds into what was called the “Consolidated Stock of the Nation,” consisting of perpetual bonds paying 3.5% a year. In other words, Great Britain, the most important capitalist nation in the world, had a bond market made up of bonds -- known as consols -- with no set redemption date.
When Alexander Hamilton consolidated the debts of the newly independent United States, he did much the same thing. Revolutionary-era debts were combined into a new, national debt with no fixed maturity date. But these perpetual bonds could eventually be converted – as was the government’ prerogative – into bonds with a definite maturity date.
Indeed, the nineteenth century witnessed a larger revolt against the idea of perpetual financing. The U.S. got rid of its perpetual debt by the 1830s, replacing it with fixed-maturity obligations; Britain redeemed and refinanced many of its consols in 1888, securing lower interest rates. The reason? Years of deflation made it wise to lock in better interest rates.
Britain redeemed the last of the consols in 2015. But maybe what looked like the symbolic end of perpetual finance was really the beginning of a new era of never-ending debt payments.
Indeed, with a growing number of public and private debtors issuing debt of ever-lengthening maturity, why not go all the way, and stretch the yield curve to asymptotic infinity?
That’s how debt markets began many centuries ago. They may end up there again.
To contact the editor responsible for this story: Mike Nizza at mnizza3@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.
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