Before the banksters:
Abstract: How do credit markets function in societies where legal contract enforcement is weak? This paper uses a model to examine how the institution of personal pledging aided the development of credit markets in medieval England. It demonstrates how the practice of pledging improved repayment rates by lowering enforcement costs, mitigating the problems associated with adverse selection, and provides an additional source of mutual insurance. By combining the model with historical evidence, it can be shown that pledging helped to enable illiterate peasants to gain access to capital markets.
Introduction: How did credit markets emerged in medieval England? This is the puzzle addressed in this paper. It is a puzzle because credit markets developed in England in the absence of institutions like notary credit or widespread access to debt registries, which played important roles in the development of credit in continental Europe. Most peasants were illiterate and rural credit was typically based oral contracts. Moreover, the legal institutions responsible for enforcing contracts were weak.
For this reason the study of rural credit was neglected by historians until recently comparatively. They emphasized the importance of a non-market economy based on the manor in which money was not the dominant medium of exchange and land was held by customary tenure and was rarely permanently alienated.2 Research in the past few years, however, suggests that a rural credit markets did exist in medieval England and that they were comparatively effective enabling a broad swathe of the population to access capital.