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.