What my credit can do in (medieval) Venice

Mueller, Reinhold C. (1987) I banchi locali a Venezia nel Tardo Medioevo. Studi Storici, 28/1: 145-55.

There is a lot to be admired in Austrian economists, their resilience, their attachment to simple elegant ideas and their sound understanding of the long-term factors that give the economy its cyclical nature. But one must admit that their Ludite-like hatred for finance is to the very least puzzling. They claim to trust nothing but gold and they would like to see the activity of banks restricted to little more than a locker service. Their trust in free market and in the adaptive nature of human ingenuity ends at the door of their local branch of HSBC.

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

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.

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

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

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.

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

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

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.

Vodpod videos no longer available. Molière “L’Avare”

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

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.

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”.