Béguin K. (2005) Finance in times of uncertainty

Béguin, Katia (2005) La circulation des rentes constituées dans la France du XVIIe siècle. Une approche de l’incertitude économique. Annales. Histoire, Sciences Sociales, 60/5 : 1229-1244.

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Priceless markets

In early modern France, interest rates seldom varied; on the other hand what did determined price of financial assets was their idiosyncratic risk. The reputation of the borrower was the key of any transaction. It explains why notaries, the most able to asses one’s credit were the most important intermediaries of the period. This was true for personal loans but also for the sales of bonds emitted by the monarchy, local governments, clergy, etc. (p.1230)

The author bases her analysis on the history of two hundred bonds emitted by the state in 1634 and bought back in 1674 for which sales and inheritance are known (p.1231). Since in the eyes of the Church a loan with a fixed maturity and interest rate would be considered usury (p.1232), at the time of the emission the interest rate alone was assigned, the maturity remaining subjected to the good will of the borrower. This made an active secondary market all the more important as there may be no other way for the investor to get his principal back for a long while.

A very complex situation

The rente was a collateralized security and as such considered as a mortgage giving the lender a claim on the collateral – usually a house or other securities owned by the borrower (p.1233). It is a good example of how ubiquitous mortgage was in Ancien Regime France. Some contemporaries indeed remarked that it was nearly impossible to buy or inherited an estate over which no one else had claims on (p.1234).  Since getting to know these claims before hand was difficult, property rights were severely undermined.

Situation was made worse by the Wars of Religion and the Fronde as many estates mortgaged were destroyed or in enemy territory or the payment of interests on bonds used as collaterals stopped. The jurisprudence develop in such fashion that the seller on the secondary market was to be held responsible in case of default from the original borrower. One exception however was the government bonds for which delays in the payment were merely considered as temporary problems since the king could not be sued by the original loaner (p.1235).

Of incertitude…

Despite these issues, the bonds were commonly exchanged from 1634 to 1679, on average two or three times per title (p.1236). Trade was brisk during the first years but the problems the monarchy run into after 1640 drastically diminished it almost to a standstill during the Fronde. Trading came back slowly after 1655 and accelerated after the king re-established confidence by bringing down the 1000 pounds face value to 300, much closer from the secondary market price.

So the general incertitude imposed on the bonds by the jurisprudence and the lack of maturity date, did not prevent trade altogether. However, trade had to adapt to uncertainty (p.1237). For instance, the heirs would typically divide the rente in equal lots between each other, unlike what had been the habit until then, because the actual value of the security was impossible to determine and another option could have left one of them exposed to unwanted risk (p.1239).

… and the ways to over come it

The trade contracts also increasingly stipulated clauses designed to protect the seller for the bonds perceived as the riskiest. However best-practice seems to have spread so fast and completely amongst wealth-owners (p.1242) that it is safe to assume that professionals — the notaries — were the cause of this evolution. Even away from Paris, they had a number of ways to assess the relative risk of a given security: those paying coupons on a quarterly basis being much more sensitive to the potential reversal of fortune of the issuer were consider much safer as only trustworthy borrower would agree to send these regular signals, pamphlets were also an efficient way to carry gossips all over.

It impossible to know however what role did prices play since by law, all trade had to be at par to avoid the taint of usury (p.1243). It remains clear nonetheless that wealth-owner maintained their confidence in the borrowers over the period, even in the first of them: the king. Indeed, the sovereign despite a number of measures harmful to them, had to take into account ultimately their interest if he intended to borrow some more later (p.1244).

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