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.