Flandreau M. et al. (2009) Financiers without borders

Flandreau, Marc, Christophe Galimard, Clemens Jobst and Pilar Nogués-Marco (2009) “Monetary Geography Before the Industrial Revolution”, CEPR, DP7169, 25p.

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Some argue that national moneys have been constructed by states, but not before the 19th century. Prior, during the 18th century, there were no monetary borders to speak of and local markets were integrated by the ubiquitous bills of exchange; regulation remaining at a sub-national level (cities; p.1). Others have pointed out that the financial geography was not that seamless and that a shape arose from endogenous elements (transaction costs, agglomeration economies, etc.). Finally, institutionalist economists have argued that factors such as parliaments and constitutions were critical in the dawn of international finance (p.2).

No such thing as a country

In 18th century Europe, there existed no clear difference in the way domestic and international bills were treated. Indeed, “bills between two cities of the same [polity] did not trade at one for one, but rather at a discount or a premium depending on supply and demand”. In other words, 1000 écus in Paris did not equal 1000 écus in Lyon; p.4). The continent should not be seen as divided between homogeneous countries but rather as a dense network of cities.

Merchant in a given city could perfectly refuse bills issued on another city within the same state: “monetary space and political space […] did not overlap” (p.5). Agents favoured cities with low interest rates and an appreciable liquidity (i.e. the likeliness of finding someone willing to buy the bill), regardless of national factors (p.7).

First observations

The authors reconstitute the financial trails linking the different cities using quoted interest rates harvested from commercial publications. The most obvious pattern they stumbled upon in their result was the strictly European scope of the system. Constantinople and Smyrna were the only cities quoted outside the continent, colonial centres were conspicuously absent (p. 14).

Just as noticeable was the fact that English, Welsh and Scottish cities “never reported exchange rates, except those of London”. In other words, British merchants not based in London still used the city as their sole intermediary for domestic and international settlements, which points at a unique level of national integration, making Britain a complete outlier in the European context (p.15).

Unsurprisingly, no city is quoted East of the Vienna-St Petersburg line. In the same expected way, half the centres mentioned are port-towns (p.16).


“Amsterdam was quoted almost everywhere implying that multilateral settlements using Amsterdam as a clearing centre was definitely feasible by the mid-18th century” (p.17).

“We note the triangle of intense financial linkages that goes from Amsterdam-London-Paris-Hamburgs and shrinks as it heads towards Italy. This triangle overlaps with Brunet’s Blue Banana area of modern economic prosperity. Othermore isolated centres are Vienna on the East and Madrid and Cadiz on the South West” (p.18).

Only about 10% of the potential links between the various cities were active, suggesting a striking concentration of settlements and thus that financial centres distinct from purely commercial hubs had emerged. The system seems to have been particularly efficient since any city was only 1.9 links away from any other one on average, which shows the importance of secondary connecting hubs (p.19).


Eighteenth-century European finance also appears to have been built on a core-periphery relationship with the “capitals of capital “ (Amsterdam, Paris, London) acting as the core and seven circles of lesser centres concentrically spread around them (p.20). Noticeably centres that commercially were declining (Leghorn, Genoa, even Amsterdam) retained important financial functions. The authors reach the conclusion that “liquidity tends to have a momentum of its own” allowing former leading trading centres to maintain and even deepen their advantage as specialized financial intermediaries. Finally, the institutional factors often mentioned in national histories are unobservable at the continental scale (p.21).


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List of countries in blockmodel

Table 2 to come

Disclaimer: this summary is written by the contributors of the blog and not by the author of the article. Any mistake is Manuel’s fault (and he shall be punished). It should also be noted that this is a working paper and should be taken as such.

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