Finance and gambling in early modern Europe or why Arrow-Debreu can be fun

December 25, 2010

Hedge fund managers playing poker and investment gurus using their skills in casinos are part of the contemporary mythology surrounding the world of finance. This makes it surprising that when Merton listed the functions performed by financial markets and institutions he did not include a very important one: entertainment. Had he considered early modern Europe, the striking resemblance between a casino and a stock exchange would certainly not have eluded him.

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Saito, O. and T. Settsu: one banker v. seven samurais

December 20, 2010

Saito, Osamu and Tokihiko Settsu (2006) Money, credit and Smithian growth in Tokugawa Japan. Hitotsubashi University. Institute of Economic Research. Discussion Paper #139.

In Osaka, Japan’s commercial capital, under the Tokugawa, rich merchants began to add to their functions that of lender to the mighty overlords (daymo) who needed to transform the production of their domain in bullion in order to cover their expenses in Edo and the taxes due to the Shogun (p.2). At the time, the country was segmented in small local capital market and no security was traded over the whole country. Despite those limitations, the rural industries did grow over the period, yet for that they had to have access to some fundings. Where did this capital come from? (p.3)

This wholesaler system arose in replacement of an inexistent banking sector (p.4). However this organization favored greatly the Osaka merchant who managed to impose de facto their service as a necessary precondition to any industrial or agricultural endeavor (p.5). But at that time, local merchants took on Osaka’s oligopoly.

To develop the production and trade of a wealth of proto-industrial products, they started delivering themselves those products to Edo, thus by-passing the Osaka intermediaries. Local lords backed these initiatives, for instance by issuing bank notes (hansatsu) to remedy to the dramatic shortages of money (p.9). However often successful, these initiatives led to a quick segmentation of the Japanese capital market and each of these small areas suffered from high interest rates (more than 18%), while at the same time interest rates in Osaka kept following (p.10).

A system, close to the earlier one arose after the Meiji Revolution, but this time with several commercial cities as the center of the operations instead of Osaka alone (p.13).

Opper S. (1993): the incredible story of the fleeing Dutchmen

December 13, 2010

Oppers, Stefan E. (1993) The Interest Rate Effect of Dutch Money in Eighteen-Century Britain. The Journal of Economic History, 53/1: 25-43.

Dutch citizens invested heavily in Britain over the 18th century. Even though the English themselves regarded this phenomenon as a necessary evil, it greatly help the Crown to levy the necessary capital for its expenses over the century (p.28). In the 1740s Dutch financiers in London had become critical for the funding of the government’s deficit. To a large extent it can even be said that the Seven Years War was won thanks to foreign money.

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Hoffman, P., Postel-Vinay, G. and Rosenthal, J.-L. …and notaries never became bankers

December 9, 2010

Hoffman, Philip T., Gilles Postel-Vinay and Jean-Laurent Rosenthal (2001) Notaries, Banking and the Expansion of Credit in Old-Regime Paris, chapter 7 in Priceless Markets. The Political Economy of Credit in Paris, 1660-1870. University of Chicago Press, Chicago and London; p.136-176.

Some of the ideas developed in this chapter have been presented elsewhere, so this summary concentrates on the what’s new.

Evidence indicates that in the second quarter of the 18th century, some Parisian notaries were venturing away from the role of brokers between creditors and debtors they had acquired since the mid 1600s. In effect some of them were filling the position left empty by the absence of deposit banks (p.138). They were accepting interest-bearing deposits redeemable on demand and investing the money in different longer term assets such as bills of exchange, government debt and loans to individuals.

Moral hazards
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Béguin K. (2005) Finance in times of uncertainty

January 16, 2010

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.

Vodpod videos no longer available. Molière “L’Avare” Read the rest of this entry »

Kindleberger C. (1991) An early manic episod

December 25, 2009

Kindleberger, Charles P. (1991) The economic Crisis of 1619 and 1623. The Journal of Economic History, 51/1 : 149-175.


The early European 17th century has commonly been described as the troublesome transition from a medieval to a modern economy (p.149). The multi-layered crisis of 1619-23 is a perfect embodiment of the woes of the time. However, the author’s “interest in that crisis does not concern its potential role as a catalyst of modern economies, but rather its function in the mechanism for the spread of a primarily financial crisis from one part of Europe to another” (p.150). Read the rest of this entry »

DuPlessis R. & Howell M. (1982) Killing capitalism in its craddle (twice)

November 21, 2009

DuPlessis, Robert S. and Martha C. Howell (1982) Reconsidering the Early Modern Urban Economy : The Case of Leiden and Lille. Past and Present, 94/, 49-84.

In Marx’s view, capitalism had arisen in the late Middle Ages out of a production system dominated by lords and guilds. In this framework, urban economies can be regarded as the craddle of capitalism (p.44), the places where capital and labour were separated through the use of putting-out, or the hiring of a migrant or female workforce (p.45). However some cities, such as Leiden and Lille where artisans remained proprietors of their means of production, still managed to integrated the very competitive European textile market (p.46). Read the rest of this entry »

Murphy A. (2009) The smartest boys in the alley, early derivatives on the London stock market

October 24, 2009

Murphy, Anne L. (2009) Trading options before Black-Scholes: a study of the market in late seventeenth-century London. Economic History Review, 62/1: 8-30.

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The ledger of the financial broker Charles Blunt contains the details of some 1,500 transactions realized between 1692 and 1695, about a third of which regard the then novel trade in equity options (p.9). The technique had arisen in the 1620s in the commodity market and was proving very useful in the decade following the Glorious Revolution, when some 100 joint-stock companies were floated in London  (p.10). During the boom of the early 1690s, it is likely that “several thousand derivatives were transacted each year”.

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Bochove C. van (2008) Outsourcing financial modernisation

October 11, 2009

Bochove, Christiaan van (2008) “Integration of Denmark-Norway in the Dutch capital market”, chapter 4 in The Economic Consequences of the Dutch. Economic integration around the North Sea, 1500-1800, Amsterdam: Aksant, 90-125.

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The early modern markets for goods and labour were highly integrated. As the country’s Golden Age came to an end, by 1700, Dutch capital was increasingly finding investment opportunities abroad, chiefly in Great Britain but also in the Danish Kingdom (p.90). It had not always been the case. For instance around 1600, trade with Norway was conducted with cash rather than bills of exchange, a sure sign of poor integration. The concentration of trade in the hands of a local business elite (rather than scattered between small producers) made this modernization possible. By the mid century Norwegian merchants started drawing credit from Amsterdam (p.93). Read the rest of this entry »

Murphy A. (2006) The Financial Revolution: a supply-side story (for real)

October 9, 2009

Murphy, Anne L. (2006) “Dealing with Uncertainty: Managing Personal Investment in the Early English National Debt”, History, 91/302, 200-17.

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The sums involved in the so-called English Financial Revolution following the arrival on the throne of William III were altogether not that important: £6.9m from 1688 to 1702 while the government budget over the period reached £72m. However, “the impact of those novel methods of fund-raising was considerable”. In particular because small wealth-owners represented a large share of these early investors (p.201). Samuel Jeake, a merchant from Rye (East Sussex) was one of those small investors. He recorded his thought and his transactions in a diary and a few letters (p.202). Read the rest of this entry »

Fontaine L. (2008) When relief is worth more than a treasure

October 8, 2009

Fontaine, Laurence (2008) “Entre banque et assistance: la création des monts-de-piété”, chapter 6 in L’Economie morale. Pauvreté, crédit et confiance dans l’Europe préindustrielle. Paris : Gallimard, p.164-189.

Picture 2fontaine02FileMonte di pietà dei pilli, before 1880

The first Monti di Pietà (or mounts) were created in 15th-century Italy by Recollet monks to shield the less-fortunate from the scourge of usury. It was not so much intended to pool the poor out of misery as to provide the struggling middle dwellers with a last safety net before falling into poverty (p.164). In the peninsula, the capital hoarded in the safes of the mounts was often diverted from its original aim to be loaned to the rich. It prevented the Italian mounts from becoming really successful. However their model spread over Europe. Read the rest of this entry »

Alonso García D. (2008) For the monarchy: entrepreneurs on call

October 6, 2009

Alonso García, David (2008) “Finances royales et monde financier dans la creation de la monarchie espagnole (xvie siècle)” in Les finances royales dans la monarchie espagnole (xvie-xixe siècles), ed Anne Dubet. Rennes: Presses Unioversitaires de Rennes, 175-186.

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Early modern governments’ reliance on private finance has usually been interpreted as a sign of weakness. This is an anachronism; the use of private finance is the result of a strategy from the sovereigns (p.175). In Spain, the crown sees the involvement of the merchants in the tax-collection process as a way to enrich the kingdom (p.176). Read the rest of this entry »