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The unexpected origins of a modern financial tool | MIT News
In the early 1600s, the officials running Durham Cathedral in England were facing serious financial problems. Rising prices increased expenses. Most of the cathedral’s income came from renting land to tenants, who had long leases, so officials could not easily increase the rent. Instead, church leaders began charging periodic fees, but these often left tenants furious. And the 1600s, a time of religious schism, were not the time to alienate church members.
But in 1626, Durham authorities found a formula for the rates that tenants would accept. If tenants paid a fee equal to one year’s net land value, this would earn them a seven-year lease. A fee equal to 7.75 years of net value yielded a 21-year lease.
This was a form of discounting, the now common technique for assessing the present and future value of money by assuming a certain rate of return on that money. Durham officials probably got their numbers from new discount table books. Volumes like this had never existed before, but suddenly local church officials were applying the technique across England.
As financial innovation stories go, this one is unusual. Typically, cutting-edge financial tools can come from, well, the financial cutting-edge – bankers, traders, and investors looking for short-term profits, not clergy.
“Most people assumed that these very sophisticated calculations were implemented by stubborn capitalists, because really powerful calculations would allow them to gain an economic advantage and increase profits,” says MIT historian William Deringer, an expert in the use of quantitative reasoning. in public life. “But that was not the main or only motivator in this situation.”
Deringer published a new research paper on this episode, “Mr. Aecroid’s Tables: Economic Calculations and Social Mores in the Modern Field,” appearing in the current issue of the Journal of Modern History. In it, he uses archival research to explore how English clergy began using discounts and where. And another question: Why?
Enter inflation
Today, discounting is a widespread tool. A dollar today is worth more than a dollar a decade from now, as it is possible to make money by investing it in the meantime. This concept heavily informs investment markets, corporate finance, and even the NFL draft (where trading this year’s picks yields a greater number of future picks). As historian William N. Goetzmann wrote, the related idea of net present value “is the most important tool in modern finance.” But although discounting has been known since the mathematician Leonardo of Pisa (often called Fibonacci) in the 1200s, why were the English clergy one of its most enthusiastic early adopters?
The answer involves a global change in the 1500s: the “price revolution,” in which things began to cost more after a long period in which prices had remained constant. In other words, inflation hit the world.
“Until then, people lived with the expectation that prices would remain the same,” says Deringer. “The idea that prices changed systematically was shocking.”
For Durham Cathedral, inflation meant the organization had to pay more for assets, while three-quarters of its income came from tenants’ rents, which were difficult to change. Many leases were complex and some were guaranteed for the rest of the tenant’s life. Durham leaders have intermittently charged tenants fees, but this has led to angry responses and lawsuits.
Meanwhile, the tenants had an additional advantage against the Church of England: religious competition after the Reformation. England’s political and religious schisms would lead England into civil war by mid-century. Perhaps some private owners could drastically increase fees, but the church did not want to lose followers that way.
“Some individual landowners could be ruthlessly thrifty, but the Church could not, because it was in the midst of incredible political and religious turmoil after the Reformation,” says Deringer. “The Church of England is in this precarious position. They are walking the line between Catholics who don’t think there should have been a Reformation and Puritans who don’t think there should have been bishops. If they are perceived to be harming your livestock, it will have real consequences. The church is trying to make the finances work, but in a way that is barely tolerable to the tenants.”
Enter the deduction table books, which allowed local church leaders to adjust finances. Essentially, the discount more carefully calibrated the initial fees that tenants would pay periodically. Church leaders could simply plug in the numbers as compromises.
During this period, the first discount book with prominent tables in England was published in 1613; his most enduring is Ambrose Acroyd’s “Table of Leases and Interests,” dated 1628-29. Acroyd was bursar of Cambridge University’s Trinity College, which as a landowner (and church-affiliated institution) faced the same problems regarding inflation and rent. Durham Cathedral began using off-the-shelf discount formulas in 1626, also resolving decades of localized disagreements.
Executing justice
Book discount tables didn’t work just because the price was right. After circulating clergy popularized the notion throughout England, local leaders were able to justify using the books because others were doing so. The clergy were “acting justly,” as Deringer says.
“Strict calculation rules assured tenants and courts that fines were reasonable, limiting landlords’ ability to maximize revenue,” Deringer writes in the new article.
In fact, local church leaders in England used the discounts for their own economic interest. It simply wasn’t the greatest possible economic interest in the short term. And it was a solid strategy.
“In Durham they fought with tenants every 20 years [in the 1500s] and we reach a new agreement, but eventually this evolves into these sophisticated mechanisms, the discount tables”, adds Deringer. “And you get standardization. By the 1700s, it seems these procedures were used everywhere.”
Thus, as Deringer writes, “the mathematical tables for setting fines were not so much instruments of a capitalist transformation, but rather the axis that held together what remained of an ancient system of customary obligations, almost destroyed by macroeconomic forces”.
Once the discount was widely introduced, it never went away. Deringer’s article in the Journal of Modern History is part of a larger book project he is currently developing on discounting many facets of modern life.
Deringer was able to piece together the history of discounting in 17th-century England thanks in part to archival clues. For example, Durham University has a discount book from 1686 that describes itself as an update of Acroyd’s work; this copy was owned by a trustee of Durham Cathedral in 1700. Of the 11 extant copies of Acroyd’s work, two are in Canterbury Cathedral and Lincoln Cathedral.
Tips like this helped Deringer recognize that church leaders were very interested in discounts; His further investigation helped him see that this chapter in the history of discounting is not just about finance; also opens a new window into the turbulent 1600s.
“I never expected to research church finances, I didn’t expect it to have anything to do with the countryside, landlord-tenant relations and tenant law,” says Deringer. “I was seeing it as an interesting example of a story about ultimate economic calculation, and it ended up being more about this effort to use calculation to resolve social tensions.”