July 26th 2022

PA.059 | Financial resources and institutions: The long-run evolution of financial markets

Parallel Sessions
The session is focused on financial resources and institutions. Financial markets are dynamic systems that provide the setting for the interaction between the supply and demand for funds to different time horizons. In doing so, they are relevant for economic growth, the pooling of savings, and the diversification of risks in the economy. In this session, we aim to understand their time-varying nature and evolution from two different and complementary perspectives. On the one hand, we understand money and credit, which are exchanged in financial markets, as resources that are subject to competition among agents and that evolve as a response to the needs of trade and changes in regulation. On the other hand, from an institutional perspective, financial markets are subject to imperfections, informational asymmetries, the evolution of participating agents, and the expansion beyond national boundaries. Regarding the resource perspective, the session offers to cover three related lines of inquiry. First, how the definition of money and credit has changed throughout history, particularly as new agents gain in relevance. An example of this evolution is the transition from commodity money to convertible paper currency and then to a fiat currency. Throughout this process, both agents and regulators need to change and adapt. A second avenue for exploration has to do with the fact that the stock of financial resources is also dynamic. As a case in point, the appearance of sunspots, such as export booms allowed for trading houses to become lenders giving birth to the predecessors of commercial banks. A final query has to do with the competition between private and public agents for scarce sources of funds which, in turn, has originated differentiated public and private debt instruments and, in some cases, caused the crowding out of the private sector from the market. From an institutional perspective, the session will focus on the evolution of credit markets from the early notary credit to the more formal institutional credit offered by commercial banks. To characterise this process, particular emphasis is given to the role of information asymmetries, the protection of property rights, and the emergence of new regulatory institutions. Furthermore, the session will cover how the setup of financial markets is relevant in explaining how they integrate or disintegrate as evidenced in the synchronisation and decupling across different asset classes and between markets beyond national boundaries.
E - Macroeconomics and Monetary Economics
N - Economic History
N2 - Financial Markets and Institutions
Forero-Laverde German
Yolanda Blasco - Universitat de Barcelona
Luis Felipe Zegarra - Pontificia Universidad Catolica de Peru
Does the institutional legacy matter? Postcolonial banking systems in Latin America
Yolanda Blasco - Universitat de Barcelona
Thiago Gambi - Federal University of Alfenas
Development of early and efficient banking systems is one of the factors behind the economic growth during the 19th century. In Latin America, national independence occurred in the first half of that century. Our research arises from the concern to understand the institutional synergies that occurred since the independence of the Spanish and Portuguese colonies in America and during the national conformation of these new countries (1810-1865 approximately); with their metropolis. To what extent countries that gained independence during the 19th century, own its success in developing banking systems to which country was their metropolis? The main hypothesis indicates that banks in Latin America were born before globalization and were originally linked to trade sectors (Marichal and Gambi 2017). Traditionally, literature has stressed the lack of capital, the shortage in the demand for banking services and institutional factors as reasons for the late emergence of banking in Latin America and pays little attention to the differences experienced by each Latin American nation. In this paper we explore the institutional reasons to explain differences between three postcolonial banking systems, attending specially to development of legal framework (Lamoreaux and Rosenthal 2005). Spain developed its first bank at the end of the 18th century and its policy was restrictive in relation to the creation of new banking institutions. The expansion of banking in Spain began in the mid-nineteenth century, when the country already had a commercial regulation in place (Sudrià and Blasco-Martel 2019). Argentina and Chile, in turn, represent two former Spanish colonies with differences in their banking evolution: Argentina developed early banks (1820s), while Chile did so after 1850, when commercial regulation was established. Portugal and Brazil have a peculiar trajectory, since the first bank of the Portuguese Empire was established in the colony and not in the metropolis. In the 1830s and 1840s, when several commercial banks were created in Portugal, the Portuguese commercial code was already in effect. In the same period, Brazil also experienced the creation of commercial banks, but Brazilian commercial regulation, including banking activity, appeared only in 1850. Our work analyses the existing institutional framework in Spain and Portugal until 1860 and its influences on the creation of banking systems in Brazil, Chile and Argentina. We also offer an analytical overview of the banking development of these countries before the first globalization.
Information Asymmetries, Personal Connections and Private Credit. Evidence from Lima, Peru
Luis Felipe Zegarra - Pontificia Universidad Catolica de Peru
By relying on a sample of notarized loans, I analyze the effect of information asymmetries on the allocation of credit in the private credit market of Lima in the 19th century. In the presence of information asymmetries, lenders faced screening and monitoring costs when making loans. Lenders could rely on personal connections and repeated interaction to economize on information and transaction costs. Notarized loans contain valuable information about the identities of lenders and borrowers, collateral and loan terms. This information is useful to determine the importance of information asymmetries. I look at the history of loan transactions and determine whether personal connections and reputation influenced on the cost of credit. I also analyze the role of notaries as financial intermediaries. If notaries played a role as financial intermediaries, they would have economized on screening costs.
Financial cycle and economic cycle in Uruguay: a long-run approximation (1870-2019)
Maximiliano Presa - Universidad de le República (Uruguay) and Universitat de Vàlencia (Spain)
Henry Willebald - Universidad de la Republica
This work identifies and characterizes the financial cycle for Uruguay, between 1870 and 2019, and investigates its relationship with the real cycle in the same period. The behavior of financial sector is approximated through real domestic credit to non-financial private sector, while real cycle is obtained from GDP at constant prices. To get the cyclical components of each series, this work specifies univariate structural time series models. The relationship between the cycles is studied through cross-correlation analysis complemented by Granger causality analysis. Finally, dates for cycles are estimated with the turning points algorithm. Results, in line with international evidence, indicate the existence of a clear cyclical component in credit, with fluctuations of 8 and a half years and 22 and a half years, the former being the widest. Similarly, the estimates of the unobservable components of GDP show cycles of similar duration (8 and a half years and 21 and a half years, respectively), in line with evidence documented in the Uruguayan literature. Furthermore, financial cycle is more volatile and persistent than real cycle and presents deeper troughs, which also fits with the international literature. When seen by sub-periods, the greatest volatility of credit is reached in the years of greater openness and liberalization (especially in the First Globalization), while for GDP this occurs between 1931 and 1973. Following the theories that indicate the role of the financial system on the real sector, a procyclical relationship is found between financial cycles and real cycles, especially in the cyclical component of the longest duration. Evidence indicates that in the long cycle, GDP leads credit; in the short, the evidence is weak and in favor of credit leading GDP. These relationships change between 1974 and 2019, both in the short component (GDP leads credit) and in the long component (there is no comovement between cycles).
The Tax-Farming Contracts as Financial Resources under Agency Relations and the State Finance in the Ottoman Empire: A Comparative Analysis on Institutional Change, 1550-1800
Bora Altay - Ankara Yildirim Beyazit University
Economists and Economic Historians paid attention to the role of institutions on the economic performance of societies. During the pre-industrial period, Western Europe societies developed decentralized institutions in order to mitigate increasing financial problems due to the silver and gold flow from the New World, the new trade routes to Far East Asia and particularly changing military technology. These developments caused changes in economic and political structure from military-based societies to merchant dominated markets under complex financial institutional structures. While the rulers aimed to maximize their revenues and to find credits in order to finance their reigns, financial instruments began to emerge by the hands of new wealthier groups as merchants and financiers in Western Europe. In other words, the contractual relations between the rulers and powerful groups dominated the institutional environment which led economic growth, stagnation or decline. During the same period, the institutional environment also changed toward negotiations and bargaining between the sultan and its agents in the Ottoman Empire. More importantly, the contractual relations caused to change in the structure of agents in time. However, each society developed diverse institutional mechanisms with different rules in order to maintain the state finance. This study focuses on the financial resources and institutions that emerged in the Ottoman Empire with a comparative perspective. The Ottoman Empire failed to establish commercial banks within its institutional environment. Alternatively, the capital formation was realized under business partnerships mechanism between the sultan and wealthier groups by employing tax-farming institutions. While the traditional institutions were the basis of capital pooling in the Ottoman Empire, there were formal and informal rules that hindered the emergence of large-scale commercial banks to decrease costs of loans such as interest rates for the state finance, unlike Western Europe. In this study, the evolution of financial institutions will be examined from the primary resources with more than 400 tax-farming and 900 cash waqf contracts that shaped financial institutions of the Ottoman Empire. These contracts give the institutional change as well as diverse mechanisms in order to compare the efficiency of financial institutions and economic performances between the Ottoman Empire and Western Europe in the long-run. Besides, this study employs a game theoretical perspective to find out different equilibria that shaped institutions of each society.
Galleys, silver and credit markets: the naval foundations of Genoese financial hegemony (1575-1650)
Benoît Maréchaux - European University Institute
What mechanisms sustained the credibility of emerging financial markets in the past? The ‘rise of financial capitalism’ narrative typically focuses on the Glorious Revolution, the expansion of joint-stock companies and the development of stock markets in England and the Netherlands. As a result, it tends to consider the emergence of parliamentary institutions and corporate finance as key determinants for the development of large and liquid credit markets in the pre-modern period. This analysis has, however, obscured the coexistence of other forms of credit supply that were also relevant but relied on other mechanisms in order to solve the fundamental problems of exchange between lenders and borrowers. Studies on the notary credit in eighteenth-century Paris have for example shown the extensive role of notaries as financial intermediaries, raising new questions about the institutional foundations of credit markets in the long run. This paper contributes to this debate by analyzing the activity of the Genoese merchant-bankers who dominated the short-term lending market of the Spanish Monarchy between the 1560s and the 1640s. In order to provide money in the scattered territories of the Spanish empire, and especially in Flanders, Genoese companies borrowed money in the exchange fairs of Piacenza, the largest market of bills of exchange at the time. What supported the reliability of this international financial market? By examining accounting books and merchant correspondence of the Spinola and Pallavicini, two of the most important banking companies of the time, I show that the Piacenza credit market was sustained by the transfers of Spanish bullion from Barcelona to Genoa. I explain why the secure arrival of silver was essential for the credibility of this Italian credit market, and concretely, for the obtention and extension of loans that were negotiated through bills of exchange and were used to be repaid in bullion. In these circumstances, the security, timing and certainty of silver transfers through the Mediterranean were a critical issue. By analyzing contracts, correspondence and ledgers, I show how the Spanish government made available galleys of its Royal Fleet for this specific purpose. The warships provided were part of the squadron managed by Genoese contractors who were hired by the Spanish State but were also closely connected to the Genoese lenders based in Madrid, leading to a strong integration of the naval and financial sectors. The intervention of the Spanish State provides a good example of how the State, in collaboration with transnational elites, can be essential for the development of financial markets. It also shows how, in the early modern period, different institutional arrangements could enhance the functioning of credit markets.
The Design of the ‘Cooperative’ in Rural India, 1904-1914
Maanik Nath - Utrecht University
The cooperative enterprise was a top-down initiative in India. Colonial officials in British-ruled India designed and installed credit cooperatives to expand the supply of affordable credit in villages from 1904. Analysing new sources from three major provinces, the paper argues that excessive state participation in the design phase discouraged private saving and investment in credit cooperatives. The government reacted to low private participation by expanding the role of the state, showing that low participation and repeated government intervention was a cyclical process. Lessons from the paper suggest that state and cooperatively-owned enterprises were only compatible if state performed a passive, regulatory rather than active, managerial role. The opposite combined political, profit and developmental interests, leading to regulatory capture in the design and management of cooperatives.
From Friend to Financial Institution: The Knightly Stade Credit Cooperative, 1826-1845
Kirsten Wandschneider - University of Vienna
This paper traces the development of the knightly Stade Credit Cooperative (ritterschaftliches Kreditinstitut Stade) from 1825 to 1845. The Stade Credit Cooperative provides an interesting example of the supply of credit to the first estate. By identifying borrowers and lenders both in the private credit market before the establishment of the Cooperative, as well as of the Cooperative, this study adds to our understanding of the development of formal credit markets, and demonstrates how a credit cooperative replaced an informal peer-to-peer credit network. The Stade Cooperative also shows how the concept of the Prussian Landschaften (cooperative mortgage credit banks) was spread and adapted beyond Prussia and provided the key institutional learning for the establishment of other credit cooperatives throughout German states in the nineteenth century.
Credit Markets in a Slave Mining Frontier
Amanda Ortiz-Molina - Binghamton University
This working paper studies decentralized credit systems in the province of Chocó in New Granada, the Pacific lowlands of modern-day Colombia, between 1700 and 1810. Scholars of colonial Spanish America have shown how credit relied on personal connections in the absence of financial institutions. However, the literature only points to an indirect relation between Chocó's gold mining and credit markets. As Chocó specialized in mining, absentee miners and merchants invested profits from mine production in real estate such as haciendas in neighboring provinces.They gave these haciendas as collaterals in credit markets outside Chocó. This paper argues that there were more direct connections between Chocó's specialization in gold mining and decentralized credit systems. The loss of Chocó's notarial records prior to 1810 limits the use of quantitative methods to study notarized loans. This paper analyzes diverse primary sources like official colonial records, lawsuits on unpaid loans, and notarial records like loans or wills from cities outside Chocó. The study of these documents shows that gold mining was directly related to credit markets in three ways: absentee miners presented their mines as collateral to lenders from other regions; they invested the loans in the mines; and lenders from outside the region required payment in gold dust or gold coins. The literature argues that elites from the neighboring southern province of Cauca benefited the most from mining specialization in Chocó. Nonetheless, this paper explores the configuration of inter-regional credit connections between a frontier and mining region and diverse territories in the Viceroyalty, such as the Caribbean or Santafé. This paper questions the literature's emphasis on mine owners as absentees since scholars highlight how even by 1778 whites and creoles represented only 2% of the population, while enslaved, indigenous, and free people of color were the majority. This paper shows that non-local residents, such as colonial officials in Chocó, and locals like free blacks owned mines. Mine owners and intermediaries in Chocó established credit networks with creditors in other provinces. Furthermore, this paper relies on Chocó’s notarial records for 1810 to show a local credit market that supported economic activities like the purchase of enslaved people, supplies for mines, or the purchase of freedom of enslaved relatives. By studying the economic and social interactions between diverse actors, this paper explores how decentralized credit systems mediated power enforcement and resistance in a gold mining region.
Can Land Inequality Hamper Rural Credit Access? Can Land Reforms improve access to credit? Evidence from Mexican statelevel data, 1940-1960
Barbara Tundidor-López - Universidad Carlos III de Madrid [Madrid]
Can inequality negatively affect credit access? This paper explores the association between inequality and credit access by investigating the role of land inequality on rural credit access. Access to credit is essential for any economic sector and even more so for agriculture. Several authors (Deininger and Squire (1998), Griffin, Khan and Ickowitz (2002), Rajan and Ramcharan (2009), etc.) argue that land inequality negatively affects to rural credit access. On the one hand, their hypothesis is that land inequality cause that a large part of agrarian population does not have collateral to offer when they ask for a loan, which makes them seem less creditworthy for banking sector. On the other hand, they defend that land inequality is associated with a powerful landed elite that apart from owning majority of land, also has social and political influence that they use to bias credit into its benefit to maintain its economic position and to ensure cheap labour. This paper examines this question using the natural experiment offered by Mexico. Mexico has been an agrarian country for most of its history, with a strong landed elite, high land inequality, and with shortage of rural credit. This situation was attempted to solve in the early 20th century with the Mexican Revolution, and with one of the most important agrarian reforms in history, the Mexican agrarian reform. This reform aimed to reduce land inequality, limit the power of landed class, and improve access to rural credit by granting land to landless peasants who could use it as collateral to obtain loans. To corroborate if land inequality can negatively affect credit, and if Mexico's agrarian reform reduced land inequality and favoured credit access; I analyse the impact of land inequality on rural credit using a large collection of unpublished state- level data on land distribution, and on rural credit in Mexico for the period 1940- 1960. In fact, one of the contributions of this paper is to offer a new, original, and unique dataset of rural credit and land inequality state-by-state, that I have obtained from the original censuses of Mexico. By employing panel Ordinary Least Square, Fixed and Random Effects approach, I have found that land inequality, although harmful, did not affect access to credit in any Mexican state. Actually, access to credit depended on political factors and not on high land inequality. Moreover, the results indicate that Mexican land reform did not decrease land inequality as much as it could have reduced in 40 years, nor did it improve access to rural credit.
Fake news and corruption in late 19th century France: The case of the Compagnie Universelle du Canal de Panamá
Miguel Ortiz-Serrano - University of Sussex
Forero-Laverde German
In this paper, we wish to engage with a long running debate in the literature about whether (fake) news affect the long-run behaviour of stock prices. We explore how fake news circulated by four different newspapers in France may have affected the stock of the Compagnie Universelle du Canal de Panama. This episode takes place during 1888, while the company attempted to issue securities (obligations a lots) to fund its cash-strapped operation. Performing this study in a historical background is better than using present day data because there are fewer confounding effects and identification is more robust. From historical accounts, we know that there was pay-to-play between the Compagnie and the editors and journalists of at least 11 journals and periodicals between 1880 and 1888. The idea was to attract the maximum amount of funds when the issue took place. Furthermore, we know that payments occurred extensively between April 23rd, when the issue of the obligations à lots the company was backed by a technical commission, and June 26th, when said issue took place and was substantially undersubscribed. Consequently, we test whether these payments had the desired effect of raising the stock’s price and return to bait potential new investors. We build a new database with the daily amount and tone of news coverage on the Compagnie by four different French newspapers between 1 March and 26 June 1888. Additionally, we use broad daily coverage of 73 liquid stocks from a variety of sectors traded in the Paris Bourse from 1 March 1888 to 16 February 1889. From a methodological perspective, we use two different asset pricing models: the CAPM and the Fama-French three-factor model, to establish whether news coverage and tone explain the excess return on the Compagnie’s stock beyond the expected effect of market, size and value factors. Furthermore, we test whether this effect was different for the days before the announcement of the issue (23 April 1888) than during the days running up to its failure (26 June 1888). We find evidence of a negative and significant effect for both news coverage and tone after the announcement of issue on April 23rd. Surprisingly, the coefficient for news is negative, which indicates that an increase in news coverage and a more positive tone redounds in lower excess returns for the stock of the Compagnie. This result is robust to several specifications. To make sense of this counterintuitive finding, we test for the possibility that investors knew that the company’s issue was going to underperform beforehand and, consequently, observing very positive news in the media produced a cognitive dissonance that redounded in increased selling pressure. We find this is not the case since the dividend yield decreases as positive news ensue. This confirms that prices do increase with positive news, regardless of their veracity, but that they increase well below what is predicted by our pricing models. To test why stock prices increase less than what the model predicts, we explore whether it would be possible that a subset of investors, privy to the planting of the news, purchased stocks before they were published and that, as prices increased after publication, they would undo their positions at a profit. To test this, we use leads in our measures of coverage and tone and find that the coefficient for both becomes positive and significant five days before the news are published. This suggests that investors were following the market adagio “buy with the rumour and sell with the news”. Since we know that the news that would appear at time t had no support, in reality, there was no rumour to buy on at time t-5. Consequently, we expect that the same people who were planting the news were exploiting a market manipulation scheme.
Intermediaries’ Substitutability and Financial Network Resilience: A Hyperstructure Approach
Stefano Ugolini - Sciences Po Toulouse et LEREPS
Olivier Accominotti - Economic History Department - London School of Economics and Political Science
Delio Lucena-Piqueiro - Sciences Po Toulouse et LEREPS
In this paper, we study the resilience of a major historical, global financial network: the sterling money market during the first globalization era of 1880-1914. During this period, international goods and financial markets were as integrated as in the late twentieth century. The City of London was the centre of the global financial system and its money market – the market for sterling bills of exchange – served as a global platform for short-term international lending and borrowing. Firms located anywhere in the world used that market to obtain short-term funds from financial institutions, with the guarantee of a London-based intermediary. We analyze “firm-bank-bank” interactions in the money market network using the concepts of hypergraph and hyperstructure. We represent the entire set of money market actors as a hypergraph (a graph in which each edge can connect more than two nodes). We describe each sterling bill of exchange as a continuous intermediation chain or hyperstructure that connects three different nodes each playing one of the three roles (borrower, guarantor or lender) in the underlying credit transaction. This hyperstructure approach allows us to preserve each chain’s internal structure and unity. We develop a new method to analyse directed links between nodes within each intermediation chain. One advantage of this approach is that it allows us to consider the gatekeeping or bridging role that certain intermediaries play on the money market. We use simple simulation techniques in order to assess the systemicness of actors on the money market and draw implications for the resilience of the system. Our main finding is that systemic risk in the sterling money market was remarkably low at the beginning of the twentieth century. We find that the money market network was resilient even to the removal of central nodes. Although our assessment of intermediaries’ systemicness constitutes an upper-bound estimate, we find that no single intermediary on the money market was highly systemic. Any node removal could only generate limited damage to the network. The network’s various subsections were also all robust to the removal of individual nodes as very few agents were strictly dependent on individual nodes for their money market access. Therefore, in contrast to findings obtained on modern banking networks, our analysis of the historical sterling market reveals that an international financial network featuring low systemicness could emerge even during a period of high global economic and financial integration.
Capital, banks, and the coming of industry in the Russian Empire
Wilfried Kisling - Oxford University
This project empirically assesses the role of domestic capital – banking credit - in the development of the industrial sector of the Russian Empire. It focuses on the Empire’s rapid, government-controlled industrialisation in the late nineteenth and early twentieth centuries. Previous studies on the role of finance in the industrialization of Russia have focused on the impact of foreign investment, commonly defining it as one of the main pillars of the transition process.1 This approach seems, prima facie, logical and obvious, as even the Ministry of Finance of the Russian Empire itself declared the influx of foreign investment as the main requirement for the industrialization of its economy.2 However, at the same time the Ministry defined and limited the number and characteristics of industries that would benefit from foreign capital, controlling the capital flows by promising foreign investors certain benefits if they would invest in certain industries.3 Other industries, therefore, were reliant on domestic capital. A fact that has been overlooked by (economic) historians to date. This exclusion of the role of domestic capital has lead to serious shortcomings in the analysis and understanding of the role of finance in the industrialization of Russia, which this project aims to correct. The project address two main questions. Firstly, how did the banking sector develop in different regions of the Empire? Secondly, did regions with better access to domestic capital develop more industries? Using the largely untapped archives of the Ministry of Finance on capital flows, I create a novel data set on the monthly credit provided by domestic banks, private and state, to the different industrial sectors between 1893 and 1903, combining it with information on regional industrial production as provided by Markevich et al (RISTAT). The study of the role of finance in the Russian industrial revolution has several interests. Firstly, Russia being comparatively late, industrialized in a so called “big spurt”.4 The analysis of its finance-growth-nexus can provide new insights on the financial mechanisms that drive the economic catch up of developing countries. Secondly, the autocratic regime during its industrialization makes it a blueprint for comparative analysis with many of today’s developing economies that are under autocratic rule.5 Finally, it contributes to a better understanding of government induced and controlled processes of economic transformation. 1 Von Laue, T.H. (1969). Sergei Witte and the Industrialization of Russia. New York: Atheneum; Swetzer A. (1996). Foreign Investment and Economic Development in Tsarist Russia. In: Artisien-Maksimenko P., Adjubei Y. (eds) Foreign Investment in Russia and Other Soviet Successor States. Palgrave Macmillan, London; Dongarov, A.G. (1990). Inostrannyi capital v Rossii i SSSR. (Foreign capital in Russian and the USSR.) Moscow 2 In a Secret Memorandum to the Emperor Nikolas II, then the Minister of Finance Sergei Witte states: “We cannot wait for the natural accumulation of capital... The influx of foreign capital is, in the considered opinion of the minister of finance, the sole means by which our industry can speedily furnish our country with abundant and cheap goods...” 3 Tsechoeva, Z.I. (2012). Istoricheskii opyt provlecheniya inostrannogo kapitala v rossiiskuyu economiku v period 1861-1913 gg. (Historical experience of attracting foreign capital to the Russian economy during 1861-1913.) Doctoral dissertation. Moscow 4 Gerschenkron, A. (1962). Economic Backwardness in historical Perspective. Cambridge, MA: Harvard University Press. 5 According to the Polity data series of Marshall & Jaggers aimed at estimating levels of democracy, in 1880s - 1890s Russia was the most authoritarian state in the world having the lowest possible score (-10) and sharing this position with Iran, Thailand and Turkey. See Marshall, M.G. and K. Jaggers. (2002). Polity IV Project: Political Regime Characteristics and Transitions, 1800-2002.