Hoffman P., Postel-Vinay G. and Rosenthal J.-L. (1992) Private credit market in Paris

Hoffman, Philip T., Postel-Vinay, Gilles, and Rosenthal, Jean-Laurent (1992) “Private Credit Markets in Paris, 1690-1840”, The Journal of Economic History, 52/2, 293-306.

hoffmanphiliptpostelrosenthaljean-laurent

Introduction

In Ancien Régime France, “credit assumed such importance that, as one historian suggest, an 18th-century person’s very reputation was bound up with his ability to obtain loans.” Until the late 19th century, the usual intermediaries on the credit market were not banks but notaries (p.294). Notarial offices recorded families’ transactions for generations, notaries thus enjoyed a unique ability to access information on the parties’ financial history. Their intimate knowledge of a person’s position allowed them to match borrowers and lenders, often on short notice.

Legally, they were prohibited to take money deposits to be lent, it prevented them from becoming actual banks and they remained simple intermediaries. Notaries could be trusted by their clients because their success depended on their reputation for honesty (p.295). Private credit market was very regulated and only three types of loans were available:

  • Life annuities and perpetual annuities: legally allowed to have interest, but only up to 5%. The borrower could repay the capital if and when he wanted.
  • Promissory notes: agreed for briefer periods (one to ten years), repayment could be demanded on short notice, although not legally allowed interest were charged and often beyond the 5% limit.

The French Revolution changed many things, public bonds were not sold through notaries but through banks, the prohibition to lend at interest was lifted and the national land registry allowed to verify collaterals (thus diminishing the value of the notaries intermediation as a risk-diminishing factor; p.296). As a result the embryonic banking sector grew rapidly, even though notaries still handled most of long-term credit.

Observing the market

The Paris credit market was very much Parisian, it did not mobilize capital over vast distances. Some 90% of the borrowers and 84% of the lenders were from the city. They also disproportionately came from the elite. From 1730 to 1788, 64% of the borrowers were nobles of officers, while they represented under 9% of the city’s population. Less than 10% of the borrowers were artisans or employees (p.298) whereas they represented 78% of the population.

Some 39% of the lenders were nobles and 33% were rich bourgeois. “In a sense the credit market shifted funds within the wealthy elite, with a net flow from merchants, bourgeois, and financiers to the state and to officers and nobility – presumably not the characteristics of a market mobilizing capital directly for productive investment” (299).

Life cycle

Unsurprisingly, lenders were typically older and borrowers younger. Single women were also overrepresented amongst lenders (p.300). “The thriving Parisian credit market suggest that families alone could not match all the thrifty women and old men with all the creditworthy youths.”

Young men had large expenses (buying a government office, paying the other heirs for the bulk of the parents’ estate) but little time to amassed much liquid savings. Women and older men had to think of passing their wealth to their children and ensure themselves a comfortable old age. “The perpetual annuity was the ideal long-term financial instrument to pass on to children, whereas the life annuity suited lenders more worried about old age” (p.301). Which is confirmed by preliminary results (p.302).

Of risk and interest

In Paris, typically long-term contracts would warrant interest rates just bellow the 5% legal limit. In the provinces on the other hand, as one’s creditworthiness was more widely known within the smaller community, interest rates were usually lower (p.303). In Paris on the other hand, a lender (even helped by a notary) had little chance to know whether the borrower’s collaterals were overburdened (p.304).

Parisian borrowers seldom relied on local reputation; repeat dealing, geographical proximity, professional contacts did little to decrease interest rates. Only membership in the elite conveyed some information (indicator of wealth and access to collateral) and warranted lower interest rates.

Conclusion

“Perhaps the best information about borrowers came from the notaries. The notaries, after all, knew the intimate details of the borrower’s financial dealings, for borrowers and their families typically remained with the same notary for years. Notaries had every reason to evaluate the creditworthiness of the borrowers carefully: a mistake would offend a lender and make him take his family’s business elsewhere. Although lenders occasionally switched [notarial office], they did so rarely, which suggest that notaries performed their task well. In the privacy of their and without leaving any records they undoubtedly steered the trustworthy borrowers towards [perpetual annuities] and larger loans. The efficacy of the notaries may in turn explain why neighbourhood reputations, professional contact, or repeat dealings shed so little light on a borrower’s solvency. Such information paled to insignificance beside what the notary knew” (p.305).

4 Responses to Hoffman P., Postel-Vinay G. and Rosenthal J.-L. (1992) Private credit market in Paris

  1. sandra742 says:

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  2. Strange this post is totaly irrelevant to the search query I entered in google but it was listed on the first page. – Its absolutely impossible, but it has possibilities. – Samuel Goldwyn 1882 – 1974

  3. Then again, the opposite could be true. – I once spent a year in Philadelphia, I think it was on a Sunday. – W.C.Filelds 1880-1957

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