The Origins and Development of Financial Markets and Institutions : From the Seventeenth Century to the Present

Collectively, mankind has never had it so good despite periodic economic crises of which the current sub-prime crisis is merely the latest example. Much of this success is attributable to the increasing efficiency of the world's financial institutions as finance has proved to be one of the most important causal factors in economic performance. In a series of insightful essays, financial and economic historians examine how financial innovations from the seventeenth century to the present have continually challenged established institutional arrangements, forcing change and adaptation by governments, financial intermediaries, and financial markets. Where these have been successful, wealth creation and growth have followed. When they failed, growth slowed and sometimes economic decline has followed. These essays illustrate the difficulties of co-ordinating financial innovations in order to sustain their benefits for the wider economy, a theme that will be of interest to policy makers as well as economic historians. Half-title......Page 3 Title......Page 5 Copyright......Page 6 Dedication......Page 7 Contents......Page 9 Figures......Page 11 Tables......Page 14 Contributors......Page 17 Preface and acknowledgments......Page 23 1 Financial innovations and crises: The view backwards from Northern Rock......Page 25 I. Dutch origins......Page 35 II. Innovations of Dutch finance in France and the UK......Page 37 III. Spreading commercial financial networks......Page 41 IV. Banking and financial market innovations in the twentieth century......Page 45 References......Page 51 2 An economic explanation of the early Bank of Amsterdam, debasement, bills of exchange and the emergence of the first central bank......Page 56 I. Debasement, the underlying problem......Page 59 A. Cashiers......Page 62 B. Multiple mints......Page 63 C. Distance between debasement and creditors......Page 64 III. Minting and melting......Page 65 IV. Systemic adjustment......Page 68 V. The Wisselbank......Page 70 VI. Regulatory dilemma......Page 71 A. The mint ordinance of 1619......Page 73 B. The mint ordinance of 1622......Page 78 C. The toleration of 1638 and the crisis of 1641......Page 80 D. The agio and the mint ordinances of 1645......Page 83 E. Period of transition, 1646–1658......Page 84 F. The mint ordinance of 1659......Page 87 G. Summary......Page 88 VIII. Genesis of a central bank......Page 89 References......Page 92 3 With a view to hold: The emergence of institutional investors on the Amsterdam securities market during the seventeenth and eighteenth centuries*......Page 95 I. The endowment of Amsterdam’s public orphanage......Page 97 II. Other public welfare institutions......Page 102 III. The churches......Page 106 IV. The guilds......Page 110 V. New types of institutional investors......Page 114 VI. Conclusion......Page 117 References......Page 119 I. The rise and fall of John Law (1716–1720)......Page 123 A. The bank......Page 125 B. The company......Page 127 C. The System......Page 130 II. The Mississippi “Bubble” revisited......Page 132 A. A “managed” market......Page 134 B. Was Law’s company overvalued?......Page 138 References......Page 143 5 Sir George Caswall vs. the Duke of Portland: Financial contracts and litigation in the wake of the South Sea Bubble......Page 145 I. The South Sea Scheme and the South Sea Bubble......Page 147 II. The legal conflict to come......Page 149 III. Private financial contracts in 1720......Page 154 IV. The Duke of Portland: background and sources......Page 155 V. The Duke of Portland: his actions during the Bubble......Page 156 VI. Portland's defense......Page 162 VII. Conclusions and directions for further research......Page 174 References......Page 183 6 The bell jar: Commercial interest rates between two revolutions, 1688-1789......Page 185 A. Josiah Child, interest rates, and prosperity......Page 187 B. Constitutions, commitments and credit......Page 189 A. Searching for the risk-free rate......Page 192 Benchmarks......Page 194 The case of the missing commercial rate......Page 197 A. The bell jar: a model......Page 200 B. Methodology......Page 203 A. Minutiae......Page 208 B. Individual interest-rate series......Page 211 C. Cycles and seasonality......Page 215 D. Bilateral connections and the structure of the global money market......Page 217 V. The bell jar: inside and outside......Page 219 VI. Conclusions......Page 222 Appendix A Evidence on interest rates from secondary sources......Page 224 Appendix B Incidence on local rates on shadow foreign interest rates: nineteenth century evidence......Page 225 References......Page 227 7 Comparing the UK and US financial systems, 1790–1830......Page 233 I. Comparing the British and American economies......Page 234 II. Financial revolutions create modern financial systems......Page 236 A. Public finance and debt management......Page 239 B. Money......Page 242 C. Central banking......Page 243 D. Banking......Page 245 E. Securities markets......Page 248 F. Corporations......Page 250 IV. Assessing financial leadership......Page 253 B. Money......Page 254 D. Banking system......Page 255 F. Corporations......Page 257 V. Financial system reversals and leadership changes......Page 258 References......Page 262 8 Natural experiments in financial reform in the nineteenth century: The Davis and Gallman analysis......Page 265 I. The essential elements of Britain's financial success......Page 268 II. Imitation may be harder than innovation......Page 272 III. Banking developments compared......Page 274 IV. The Davis and Gallman comparison of securities markets......Page 279 V. Government regulations......Page 281 9 Regulatory changes and the development of the US banking market, 1870-1914: A study of profit rates and risk in national banks......Page 286 I. Interest rate differentials and the industrial dynamics of banking......Page 288 II. Regional profit rates......Page 291 III. A regression analysis of profit rate differentials......Page 294 IV. Profit rates and financial risk......Page 303 V. Conclusion......Page 311 10 Anticipating the stock market crash of 1929: The view from the floor of the stock exchange......Page 318 I. Bubbles and the price of a seat on the exchange......Page 320 II. Were NYSE brokers optimistic or pessimistic?......Page 323 III. Who bought the NYSE seats?......Page 331 IV. The New York Curb and the regional exchanges......Page 333 V. Wise brokers?......Page 341 References......Page 342 11 The development of "non-traditional" open market operations: Lessons from FDR's silver purchase program......Page 343 I. Data and empirical analysis......Page 349 II. Conclusions......Page 366 References......Page 367 12 The interwar shocks to US-Cuban trade relations: A view through sugar company stock price data......Page 369 I. Preliminary discussion......Page 371 II. The data......Page 378 III. Sugar-company equity indices......Page 380 IV. The commodity crisis and tariff endogeneity......Page 383 V. Sugar-company risk......Page 387 VI. The quality of Cuban sugar-company assets......Page 400 VII. Conclusion......Page 404 References......Page 407 13 Central bank reaction functions during the inter-war gold standard: A view from the periphery......Page 412 I. The inter-war gold exchange standard – a brief history......Page 415 II. Bank rate policies......Page 416 III. Circumstances in Central and Eastern Europe after the war......Page 419 IV. Financial reconstruction......Page 421 V. The Austrian reconstruction......Page 422 VI. Financial aid for Hungary......Page 423 VII. Other financial aid schemes......Page 425 VIII. Economic development following the reconstruction......Page 426 IX. Analysis......Page 429 X. Modeling reaction functions......Page 434 XI. Conclusion......Page 436 References......Page 437 14 When do stock market booms occur? The macroeconomic and policy environments of twentieth century booms......Page 440 I. Stock market booms and crashes......Page 441 A. Defining booms......Page 443 II. The macroeconomic environment of twentieth century booms......Page 450 III. Monetary policy and twentieth century booms......Page 453 A. The interwar period......Page 454 B. Early post-World War II era......Page 459 C. Stock market booms of the 1970s-1990s......Page 463 IV. Observations and conclusions......Page 467 Appendix Data sources......Page 469 General notes about the figures presented in the paper......Page 470 15 Lessons from history for the twenty-first century......Page 474 I. Financial crises: then and now......Page 476 II. "Overbanking" then and now......Page 479 III. The global securities market then and now......Page 480 IV. Financial innovations and government intervention......Page 482 V. Conclusion......Page 485 Index......Page 489 Half-title 3 Title 5 Copyright 6 Dedication 7 Contents 9 Figures 11 Tables 14 Contributors 17 Preface and acknowledgments 23 1 Financial innovations and crises: The view backwards from Northern Rock 25 I. Dutch origins 35 II. Innovations of Dutch finance in France and the UK 37 III. Spreading commercial financial networks 41 IV. Banking and financial market innovations in the twentieth century 45 References 51 2 An economic explanation of the early Bank of Amsterdam, debasement, bills of exchange and the emergence of the first central bank 56 I. Debasement, the underlying problem 59 II. Complications 62 A. Cashiers 62 B. Multiple mints 63 C. Distance between debasement and creditors 64 III. Minting and melting 65 IV. Systemic adjustment 68 V. The Wisselbank 70 VI. Regulatory dilemma 71 VII. Regulatory odyssey 73 A. The mint ordinance of 1619 73 B. The mint ordinance of 1622 78 C. The toleration of 1638 and the crisis of 1641 80 D. The agio and the mint ordinances of 1645 83 E. Period of transition, 1646–1658 84 F. The mint ordinance of 1659 87 G. Summary 88 VIII. Genesis of a central bank 89 References 92 3 With a view to hold: The emergence of institutional investors on the Amsterdam securities market during the seventeenth and eighteenth centuries* 95 I. The endowment of Amsterdam’s public orphanage 97 II. Other public welfare institutions 102 III. The churches 106 IV. The guilds 110 V. New types of institutional investors 114 VI. Conclusion 117 References 119 4 Was John Law's System a bubble? The Mississippi Bubble revisited 123 I. The rise and fall of John Law (1716–1720) 123 A. The bank 125 B. The company 127 C. The System 130 II. The Mississippi “Bubble” revisited 132 A. A “managed” market 134 B. Was Law’s company overvalued? 138 III. Conclusion 143 References 143 5 Sir George Caswall vs. the Duke of Portland: Financial contracts and litigation in the wake of the South Sea Bubble 145 I. The South Sea Scheme and the South Sea Bubble 147 II. The legal conflict to come 149 III. Private financial contracts in 1720 154 IV. The Duke of Portland: background and sources 155 V. The Duke of Portland: his actions during the Bubble 156 VI. Portland's defense 162 VII. Conclusions and directions for further research 174 References 183 6 The bell jar: Commercial interest rates between two revolutions, 1688-1789 185 I. Why do interest rates differ? 187 A. Josiah Child, interest rates, and prosperity 187 B. Constitutions, commitments and credit 189 II. Challenges of direct evidence 192 A. Searching for the risk-free rate 192 Benchmarks 194 The case of the missing commercial rate 197 III. Shadow interest rates 200 A. The bell jar: a model 200 B. Methodology 203 IV. New results, new insights 208 A. Minutiae 208 B. Individual interest-rate series 211 C. Cycles and seasonality 215 D. Bilateral connections and the structure of the global money market 217 V. The bell jar: inside and outside 219 VI. Conclusions 222 Appendix A Evidence on interest rates from secondary sources 224 Appendix B Incidence on local rates on shadow foreign interest rates: nineteenth century evidence 225 References 227 7 Comparing the UK and US financial systems, 1790–1830 233 I. Comparing the British and American economies 234 II. Financial revolutions create modern financial systems 236 III. Comparing the British and US financial sectors 239 A. Public finance and debt management 239 B. Money 242 C. Central banking 243 D. Banking 245 E. Securities markets 248 F. Corporations 250 IV. Assessing financial leadership 253 A. Public finance and debt 254 B. Money 254 C. Central banking 255 D. Banking system 255 E. Securities markets 257 F. Corporations 257 V. Financial system reversals and leadership changes 258 References 262 8 Natural experiments in financial reform in the nineteenth century: The Davis and Gallman analysis 265 I. The essential elements of Britain's financial success 268 II. Imitation may be harder than innovation 272 III. Banking developments compared 274 IV. The Davis and Gallman comparison of securities markets 279 V. Government regulations 281 9 Regulatory changes and the development of the US banking market, 1870-1914: A study of profit rates and risk in national banks 286 I. Interest rate differentials and the industrial dynamics of banking 288 II. Regional profit rates 291 III. A regression analysis of profit rate differentials 294 IV. Profit rates and financial risk 303 V. Conclusion 311 10 Anticipating the stock market crash of 1929: The view from the floor of the stock exchange 318 I. Bubbles and the price of a seat on the exchange 320 II. Were NYSE brokers optimistic or pessimistic? 323 III. Who bought the NYSE seats? 331 IV. The New York Curb and the regional exchanges 333 V. Wise brokers? 341 References 342 11 The development of "non-traditional" open market operations: Lessons from FDR's silver purchase program 343 I. Data and empirical analysis 349 II. Conclusions 366 References 367 12 The interwar shocks to US-Cuban trade relations: A view through sugar company stock price data 369 I. Preliminary discussion 371 II. The data 378 III. Sugar-company equity indices 380 IV. The commodity crisis and tariff endogeneity 383 V. Sugar-company risk 387 VI. The quality of Cuban sugar-company assets 400 VII. Conclusion 404 References 407 13 Central bank reaction functions during the inter-war gold standard: A view from the periphery 412 I. The inter-war gold exchange standard – a brief history 415 II. Bank rate policies 416 III. Circumstances in Central and Eastern Europe after the war 419 IV. Financial reconstruction 421 V. The Austrian reconstruction 422 VI. Financial aid for Hungary 423 VII. Other financial aid schemes 425 VIII. Economic development following the reconstruction 426 IX. Analysis 429 X. Modeling reaction functions 434 XI. Conclusion 436 References 437 14 When do stock market booms occur? The macroeconomic and policy environments of twentieth century booms 440 I. Stock market booms and crashes 441 A. Defining booms 443 II. The macroeconomic environment of twentieth century booms 450 III. Monetary policy and twentieth century booms 453 A. The interwar period 454 B. Early post-World War II era 459 C. Stock market booms of the 1970s-1990s 463 IV. Observations and conclusions 467 Appendix Data sources 469 General notes about the figures presented in the paper 470 15 Lessons from history for the twenty-first century 474 I. Financial crises: then and now 476 II. "Overbanking" then and now 479 III. The global securities market then and now 480 IV. Financial innovations and government intervention 482 V. Conclusion 485 Index 489 0521895170,9780521895170,9780511757341 Cambridge University Press "Collectively, mankind has never had it so good despite periodic economic crises of which the current sub-prime crisis is merely the latest example. Much of this success is attributable to the increasing efficiency of the world's financial institutions as finance has proved to be one of the most important causal factors in economic performance. In a series of original essays, leading financial and economic historians examine how financial innovations from the seventeenth century to the present have continually challenged established institutional arrangements, forcing change and adaptation by governments, financial intermediaries, and financial markets. Where these have been successful, wealth creation and growth have followed. When they failed, growth slowed and sometimes economic decline has followed. These essays illustrate the difficulties of coordinating financial innovations in order to sustain their benefits for the wider economy, a theme that will be of interest to policy makers as well as economic historians."--Jacket