Adrian R. Bell, Chris Brooks, and Tony K. Moore (ICMA Centre, Henley Business School, University of Reading)
Henley Business School Discussion Paper Series, January (2014)
This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single series and panel unit root and stationarity tests on ten real exchange rates between 1383 and 1411, we show that the parity relationship held for the pound sterling and some of the Florentine florin series individually and for almost all of the groups that we investigate. Our findings add to the weight of evidence that trading and arbitrage activities stopped currencies deviating permanently from fair values and that the medieval financial markets were well functioning. This supports the results reported in other recent studies which indicate that many elements of modern economic theories can be traced back over 700 years in Europe.
Contrary to popular conception, the laws of supply and demand were well known in the Middle Ages. According to the fourteenth century theologian San Bernardino, the just price was that ‘which happens to prevail at a given time according to the estimation of the market, that is, what the commodities for sale are then commonly worth in a certain place’ (de Roover, 1967). Even earlier, the English theologian Richard of Middleton (d.1302) pointed out that two countries, one in which grain was plentiful and cheap but wine scarce and expensive, and the other in which wine was abundant and grain in short supply, would both benefit from exchanging their surpluses. Moreover, the merchants that intermediated this trade could justly profit from buying at the lower market price in one country and selling at the higher market price in the other (de Roover, 1963).