Welcome to The Long Run

On behalf of the Economic History Society (EHS), it is a pleasure to welcome you to The Long Run, the EHS blog.

This blog aims to encourage discussion of economic and social history, broadly defined. We live in a time of major social and economic change, and research in social science is showing more and more that a historical and long-term approach to current issues is the key to understanding our times.

We welcome any contribution or suggestion – please contact us at ehs.thelongrun@gmail.com

 

British exports and American tariffs, 1870-1913

by Brian D Varian (Swansea University)

B. Saul (1965) once referred to late nineteenth-century Britain as the ‘export economy’. During this period, one of Britain’s largest export markets—in some years, the largest market—was the United States. To the United States, Britain exported a range of (mainly manufactured) goods spanning such industries as iron, steel, tinplate, textiles, and numerous others.

A forthcoming article in the Economic History Review argues that the total volume of British exports to the United States was significantly affected by American tariffs during the interval from 1870-1913. The argument runs contrary to the more general finding of Jacks et al. (2010) that Britain’s trade with a sample of countries, i.e. not just the United States, was uninfluenced by foreign tariffs.

This argument complements some previous studies that focused on specific commodities that Britain exported to the United States in the late nineteenth century. Irwin (2000) found that Britain’s tinplate exports to the United States were indeed responsive to changes in the American duty on tinplate. Inwood and Keay (2015) reached a similar conclusion regarding Britain’s pig iron exports to the United States. However, as this research claims, the determinacy of American tariffs for the volume of British exports was not limited to only certain commodities, but rather applied to the bilateral flow of trade, as a whole.

The United States imposed different duties on different commodities. Because the composition of commodities that the United States imported from all countries collectively differed from the composition of commodities that the United States imported from Britain, the average American tariff is an inaccurate measure of the tariff level encountered by, specifically, British exports to the United States. For this reason, this research reconstruct an annual series of the bilateral American tariff toward Britain for the interval from 1870-1913, using the disaggregated data reported in the historical trade statistics of the United States. This reconstructed series is crucial to the argument.

chart

The figure above presents the average American tariff and the reconstructed bilateral American tariff toward Britain, both expressed as percentages (ad valorem equivalent percentages, to be precise). In the 1890s, the average American tariff and the bilateral American tariff toward Britain do not follow a similar course. For example, whereas the tariff revisions of the Wilson-Gorman Tariff Act of 1894 had little effect on the average American tariff, these tariff revisions resulted in the bilateral American tariff toward Britain declining from 45% in 1893/4 to 31% in 1894/5.

This econometric analysis of the Anglo-American bilateral trade flow relies upon the empirically-correct bilateral American tariff toward Britain. In this respect, the forthcoming article in the Economic History Review departs from other historical studies of trade, which use average tariffs as approximations of bilateral tariffs.

Perhaps the reconstruction of another country’s bilateral tariff toward Britain—Germany’s tariff toward Britain is an obvious choice—would reveal that the effect of foreign tariffs on British exports was more widespread than just the bilateral American case. Nevertheless, the importance of the bilateral American case should not be diminished, as the United States was a large export market of Britain, the ‘export economy’ of the late nineteenth century.

 

Link to the article: http://onlinelibrary.wiley.com/doi/10.1111/ehr.12486/full

To contact the author: b.d.varian@swansea.ac.uk

 

References

Inwood, K. and Keay, I., ‘Transport costs and trade volumes: evidence from the trans-Atlantic iron trade, 1870-1913’, Journal of Economic History, 75 (2015), pp. 95-124.

Irwin, D. A., Did late-nineteenth-century US tariffs promote infant industries? Evidence from the tinplate industry’, Journal of Economic History, 60 (2000), pp. 335-60.

Jacks, D., Meissner, C. M., and Novy, D., ‘Trade costs in the first wave of globalization’, Explorations in Economic History, 47 (2010), pp. 127-41.

Saul, S. B., ‘The export economy, 1870-1914’, Bulletin of Economic Research, 17 (1965), pp. 5-18.

Pieces of Eight: Sailors, Wages, and Trade

by Richard Blakemore (University of Reading) – research conducted at the University of Exeter thanks to a ERC project.

 

In April 1642, Michael Johnson sailed from London aboard the Fame. The voyage took him to northern France, southern Spain, and the Caribbean, and Johnson started it with a ‘venture’, a personal investment of cash or goods, worth £5. He spent the voyage ‘turneinge and winding’ (as one of his shipmates put it) his venture and his wages: hiring out his cabin to passengers, buying and selling at each port. By the time the ship was heading for home, Johnson had accumulated 200 pieces of eight and some cargo, altogether worth roughly £50 – ten times his original ‘venture’.

Screen Shot 2017-11-07 at 16.34.12
A white sailor seated and a black sailor standing; to left, the black sailor standing with the white sailor seated in profile facing right, and with a ship behind to right; a round composition. c.1660 Etching. From The British Museum, available at

 

This example invites us to reconsider the traditional image of mariners as wage workers, as poor and unskilled labourers, sitting at the bottom of a strictly ranked workforce. That is what this article is set to do.

This idea of mariners has endured among historians in part because it was popular among those mariners’ contemporaries, especially during the early modern period when global trade and shipping expanded enormously. A proverb from that period claims that ‘the sea and the gallows refuseth nobody’. Yet this interpretation has also been founded on a relatively limited analysis of sailors’ wages, which sought mainly to identify averages across the sector. This article presents a more detailed discussion of this topic, based on a dataset gathered from the papers of the High Court of Admiralty. It is possible to download the dataset here.

The data confirms the impression of a hierarchical labour market, with clear thresholds between ranks. Most mariners (sailors with no specific role) earned less than most specialists (men with a specific job, like boatswain, gunner, or carpenter); most specialists earned less than masters and master’s mates, who navigated and commanded ships. However, there was also remarkable variety – across the seventeenth century, mariners earned between 5 and 55 shillings a month, specialists between 13 and 100 shillings, though in both cases there was predictable lumping around a median point.

Such variation can be explained by the circumstances of a voyage, such as length, destination, and anticipated riskiness. In wartime, for instance, wages rose for most seafarers. This also reflects different levels of skill and social capital for individual sailors at all levels of the shipping industry. In other words, we must recognise that at least some mariners, as well as those at higher ranks, were experienced workers who could claim a skill premium in their wages.

As well as exploring this variety in wages, we also need to look beyond them to other forms of income – something which, like wages, scholars have often treated briefly, and with more attention to the activities of shipmasters. There were multiple available arrangements. Sailors might receive a share of the profits from a voyage, especially when working on a fishing vessel or a privateer, and they also expected a full ‘diet’ aboard ship, and protested loudly when the food did not meet their expectations.

Most crucially, it seems that Michael Johnson was not alone. Many sailors of all ranks carried goods aboard ship, sometimes in their own cabin or chest, sometimes in larger volumes with the ship’s other cargo. This is an area that historians have begun to investigate in more depth (as in this article by Beverly Lemire, and this roundtable edited by Maria Fusaro). Though there is not enough evidence on the value of these goods for a systematic analysis, we can at least establish that the practice was ubiquitous, and that it formed a significant portion of many seafarers’ incomes.

There are implications from this evidence for our wider understanding of the shipping industry and early modern economic developments. As well as the idea that they were unskilled, sailors have often been seen as an exploited group, essential to but not benefitting from European economic growth, to which shipping and trade were dynamic contributing sectors. There is some truth to this picture: sailors’ working lives were certainly hard and dangerous, and the period saw rising inequality, with wages falling behind inflation. Nevertheless, studying seafarers’ wages and trade shows us that they sought to make the best of, and some of them were able to successfully operate in, the venture economy of early modern shipping.

 

Full article: Blakemore, R. J. (2017), Pieces of eight, pieces of eight: seamen’s earnings and the venture economy of early modern seafaring. The Economic History Review, 70: 1153–1184. doi:10.1111/ehr.12428. Available here

To contact the author: r.blakemore@reading.ac.uk

 

 

Cameralism in Practice. State Administration and Economy in Early Modern Europe

On Marten Seppel, Keith Tribe (eds.) Cameralism in Practice. State Administration and Economy in Early Modern Europe, Boydell and Brewer, Woodbridge 2017 (ISBN 978 1 78327 212 9)

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There has been a growing interest in cameralism over the last five to ten years, but it has been claimed that the only scholarly book-length treatment of cameralism in English was a 1909 work by Albion Small.

Fortunately, things are changing: the annual conferences of the European Society for the History of Economic Thought are dominated by young French and Italian scholars; the developing field of intellectual history has upgraded the quality of work done in the history of economics; and from the later 1970s onwards the history of eighteenth century political thought has emerged as a very sophisticated field, within which the study of cameralism no longer seems such a minority interest. If there is a “logic” it could be described as a literature of economic management. Thought about this way, it then becomes more obvious quite why it is so hard to define, since there is no strictly equivalent body of writing in contemporary languages such as English and French. It has become more and more clear (as argued also our collection) that besides Germany and Austria, cameralist literature on state and economy also had great influence in Sweden, Russia, Denmark and even Portugal.

The present collection focuses on the practices of cameralism. In the 1930s August Wolfgang Gerloff argued that eighteenth-century cameral science was “die Lehre von der Staatspraxis, die Lehre von der praktischen Politik” (a doctrine directed to state practice, to practical politics). However, Andre Wakefield writes that cameralism was a kind of fantasy fiction or even a utopian theory, rather than any particular plan that could be followed by administration. He believes that cameralist authors did realise that their teaching was too theoretical.

One of the main goals of our book was to bring out the innovative tendencies associated with cameralist discourse in the eighteenth century. This objective raised intriguing questions such as: did cameralism change the world? Or was there a “cameralist revolution”?

However, it may be too easy to assimilate ideas of “progress” to a present-centred history lacking an understanding of past historical commentary and argument. While it would be wrong to suggest that cameralism in some way changed the world, what we can say is that it changed the language with which the world was conceived. Whatever the outcome of cameralist “practice”, by the later part of the eighteenth century there was a new language of state administration that became transformed into the financial sciences of the nineteenth century, and thence became part of the language of public administration. It gave “practitioners” a way of talking to each other about the way in which they conducted their affairs.

What the study of cameralist literature has brought to light is the extent of our ignorance about early modern Europe, its politics and administration, its economy and society. The sheer volume of material that recent work has revealed compels us to think about new ways of exploring networks of activity and argument. Rosenberg’s work on Prussia remains important, but today it would not be appropriate to write a history of bureaucratic rule without examining the language of administration. The key to that lies in the study of cameralist literature and its language, and in a new approach to the work of administration in the European states of the eighteenth century. As I suggest above, my problem with “mercantilism” is that it presents a grid that obscures from us both diversity and convergence in early modern economic literature. Insofar as our book on cameralism and administration shows the sheer diversity of this material, I hope that it provides encouragement to others to explore this literature more systematically than has ever before been attempted.

https://boydellandbrewer.com/cameralism-in-practice.html

SAVE 25% when you order direct from the publisher. Discount applies to print and eBook editions. Click the link, add to basket and enter offer code BB500 in the box at the checkout. Alternatively call Boydell’s distributor, Wiley, on 01243 843 291 and quote the same code.

Offer ends on 2nd December. Any queries please email marketing@boydell.co.uk

 

 

 

Individual investors and local bias in the UK, 1870–1935

by J. Rutterford (Open University), D.P. Sotiropoulos (Open University), and C. van Lieshout (University of Cambridge)

 

In today’s financialised societies, households are exposed to financial risk. Researchers are currently exploring how such households make financial decisions and manage financial risk in practice. There are also substantial efforts being made by government, regulators, charities and financial players to increase the financial literacy of households to help them make better financial decisions.

This study explores the financial decisions made by a sample of late Victorian investors and attempts to draw some lessons from a period which, in its global outlook and investment opportunities, is similar to today.

money-finance-stock-exchange-paris-wood-engraving-1860-people-merchants-BJGEHY

The research shows that investors diversified their portfolios both internationally and across sectors, well before the mathematical benefits of diversification were modelled by Markowitz in the form of modern portfolio theory (MPT), which recommends that portfolio weights be chosen according to the returns and risks of individual securities but also according to the correlations between the various security returns. At the time of our study, though, contemporary investment publications also promoted the benefits of diversification in terms of enhanced yield without increased risk; they showed this by using historical data to quantify the greater returns achievable. So, nineteenth century UK investors were also aware of the benefits of spreading risk across different types of securities as recommended by MPT. The most common advice, though, was not to mathematically calculate correlation matrices, as does MPT, rather the advice was to invest equal amounts in a range of securities, the so-called 1/N or naïve diversification approach.

The paper breaks new ground in our understanding of what Victorian investors did in practice with their portfolios. Up to now, researchers have merely acknowledged that such diversification took place, or have used market prices to argue that Victorian investors ought to have diversified and quantified what such investors, had they had perfect foresight, would have gained in return terms. In contrast, this paper looks in detail at a sample of 508 investor portfolios at death, using carefully analysed probate data, for the period 1870 to 1902.

The results of the analysis of these investor portfolios allow us to draw a number of interesting conclusions. For example, the probate records of our sample show an almost equal number of women and men held financial portfolios at death, highlighting the importance of women investors in this period. Also, the research finds that, for these estates at death which included financial securities, investments represented on average a substantial 60% of gross assets, the remainder being property, life assurance, loans and cash.

The average number of financial securities held in a sample portfolio was 4.5, with a median of only 2. Surprisingly, though, this level of diversification is not dissimilar to that of portfolio holdings from US samples in the 1970s and 1990s, one hundred years later, and decades after MPT was formalised in the 1950s and 1960s. In our sample, the level of diversification was linked to wealth, with the top quartile in gross wealth terms holding an average of 11 securities in their portfolios, with men holding more diversified portfolios than women.

However, overall, investors did not hold securities in equal weights, as generally recommended in the investment literature of the period. They did not manage financial risk via naïve diversification. Nor did they evenly spread their risks across sectors and countries. For example, investors living outside London – – as well as less wealthy investors preferred the securities of domestic companies other than railways. This indicates a preference for local investment, which offers an alternative route to risk reduction, that of trust in local enterprise. This is in line with recent research on trust in the economic history literature. The research also finds that wealthier investors, who held more securities, were more willing to hold international and government securities than the less wealthy. In contrast, a surprising 35% of our sample of investors held only non-railway corporate securities in their portfolios.

In conclusion, individual investors in this late nineteenth century sample did diversify, but not as much as recommended by the contemporary literature. Instead, they relied more closely on local trust networks for their financial decision making. This does not mean that investors failed to see the benefits of international, sectoral or naïve diversification. Rather, and this is a key lesson for today’s decision makers, non-wealthy households who hold the majority of their wealth in non-tradable form and who are unable to easily hedge financial risk, are reluctant, as were their forebears, to embrace relatively sophisticated financial approaches to investment. They prefer, instead, to rely on trust, whether of the companies in which they invest or of their financial intermediaries.

 

The full paper: Rutterford J., D. P. Sotiropoulos, and C. van Lieshout (2017) “Individual investors and local bias in the UK, 1870–1935,” Economic History Review, 70, 4 (2017), pp. 1291–1320.    URL: http://www.ehs.org.uk/app/journal/article/10.1111/ehr.12482/abstract

To contact Janette Rutterford on Twitter: @JRutterford

 

On archives, macroeconomics and labour markets

Everything (well,… most things) you know about wages 1650 -1800 is wrong. That’s a great opportunity for historians

by Judy Stephenson (University of Oxford)

 

My forthcoming paper in the Economic History Review (abstract available here) makes some big claims about the level of nominal and real wages in urban England before industrialization. There is an early working paper version here

Specifically, I argue that the data used for the years between 1650 and 1800 are completely wrong because the people who compiled them (who go back in some cases to the 1930s and late nineteenth century) took figures from bills for construction services rather than actual wage books. As an actual wage book from the contractor who built the South West Tower of St Paul’s shows, men were not paid these charge out rates, they were paid considerably less.

This has some big ramifications for some influential economists and historians who have relied on long established data sets of ‘builders wages’, such as those of Phelps Brown and Hopkins (1955, 1956) to create macroeconomic models of the past to calculate real wages and infer GDP; to argue that Britain had ‘high wages’; or a comparative advantage in traded goods; or a narrower ‘skill premium’ and better institutions.

In truth, that these wages were ‘wrong’ is in no way surprising to anyone who has ever done work on early modern earning. Any historian of the eighteenth century sensed that these ‘average wages’ were unreasonably high and that their implied welfare ratios gave a falsely rosy picture. (As someone face palmed; ‘A labourer in London able to afford a respectable basket of goods for a family in the mid eighteenth century?? Have you read Dorothy George?’). Those who have ever worked with labour records and account books know that the homogenous figures found by Elizabeth Gilboy were questionable, and indeed in 2011, John Hatcher had successfully called into question the golden age of the fifteenth century. ‘Real’ day wages and wage accounts are always fascinatingly messy, unpredictable, and varied, yet econometricians clung to the old data sets because they believed it was too difficult to find anything else.

Untitled
Chart showing comparative real wages, in grams of silver, of European cities 1650 -1800, based on Allen, (2001), where the nominal wage has been reduced by 25%.

My findings make the idea that Britain was a ‘high wage’ economy in the long eighteenth century hard to sustain. If paid wages were 25% lower than we thought, the real wage for labourers through this period in London was not the highest by far. Rather, it seems, they were at the lower end of NW European advanced economies.

This is exciting for economists who think that explaining why the industrial revolution happened in Britain is the ‘Holy Grail’ (it’s back up for grabs). But, the debunking of these inaccurate wage series also makes it a really exciting time for people who want to understand the role of labour in the economy, and who think that the period before collective bargaining and factories has some strong parallels with our own. Lots has been written about the decline of ‘history’ in economic history, but the new opportunity is as wide and bright for historians as it is for economists and econometricians. This breakthrough in this long-run view on wages came not from new statistical techniques, but from the margins of dusty parchment, little iron pins, raggy old papers, smudged watered down ink, and the tentative ‘x’s’ and proud flourishes of the archives.

It’s time to stop recycling tired old data sets and expecting new technology to tell us something different about them. There is a wealth of sources and data in London archives, which have never been used before because they didn’t look comparable to Elizabeth Gilboy’s ‘day rates’, but which offer historians and economists the potential to look at earning, bargaining and the capital labour relationship in new ways. There is exciting work in progress from established and new scholars in the field. No one data set will ever be able to replace the supposed reliability of Phelps Brown and Hopkins, but even they were very tentative about their sources.

To contact the author: judy.stephenson@wadham.ox.ac.uk

References list available here

Legacies of inequality: the case of Brazil

by Evan Wigton-Jones (University of California, Riverside)

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The Rio Team. In Kidder, D.P., Brazil and the Brazilians : portrayed in historical and descriptive sketches, Philadelphia 1857. Available at https://archive.org/details/brazilbrazilians00kidd

 

 Recent years have witnessed a renewed interest in issues of economic inequality. This research offers a contribution to this discussion by analysing the effects of inequality within Brazil.

Firstly, it shows that the climate is a key determinant of long-run inequality in Brazilian context. It uses data from a national census conducted in 1920 to show that warmer regions with high rainfall were characterised by plantation economies, with a wealthy agricultural elite and a large underclass of poor labourers. In contrast, cooler and drier areas were conducive to smaller family farms, and hence resulted in a more equitable society.

The study then uses information from the 2000 census to show that this local inequality has persisted for generations: areas that were historically unequal in 1920 are generally unequal today as well.

Finally, the research shows that greater long-term inequality inhibits regional development. It also shows evidence that inequality affects local governance, as municipal spending on health, education and welfare is significantly lower in more economically unequal areas.

To show the climate’s influence on local inequality, the study created an index that quantifies the relative suitability of land for plantation agricultural production. The metric is based on the temperature and precipitation requirements of different crops that are uniquely plantation or smallholder in their method of production. For example, sugarcane has historically been produced on large plantations, while wheat was often cultivated on small farms.

The research then shows that localities with a favourable climate for plantation agriculture contained a more unequal distribution of land. To measure the concentration of land ownership, it calculates a Gini index – a standard measure of inequality that ranges from 0 (perfect equality) to 100 (one individual holds all land).

As Brazil’s economy was predominantly agrarian in 1920, this distribution of land is a good proxy for that of income and wealth. The research combines this with data on municipal spending in the 1920s to show that local governments with higher land inequality spent less on education, health, public goods and public electricity. For example, a one unit increase in the Gini index is associated with a .76 percentage point decline in such spending.

The effects of this inequality have ramifications for contemporary socio-economic welfare in Brazil. Not only has local inequality persisted throughout the twentieth century, but it has also hindered present-day municipal development. Here it measures local development using the municipal-level human development index (HDI) – a metric that accounts for education, public health and income – for the year 2000.

It shows that historically unequal areas score much lower on the HDI: a one unit increase in 1920 land inequality is associated with a reduction of .38 points in this index (which, like the Gini index, is measured on a scale from 0 to 100, with a higher score indicating greater development).

Furthermore, the legacies of historical inequality are still manifest in contemporary local governance: a one unit increase in historical inequality is associated with a .49 percentage point decrease in municipal-level welfare spending for the year 2000.

These findings suggest several important conclusions:

  • First, the environment may play an important role in determining inequality and long-term development, even within countries.
  • Second, economic disparities can persist for generations.
  • Lastly, inequality can have a corrosive effect on welfare and governance, even at a local level.

It should be noted, however, that this study has focused on inequality within Brazil. The extent to which these findings can be generalised to other settings requires further study.

Bodies as commodities: the medieval trade in Christian saints’ relics

by Elizabeth Wiedenheft (University of Nottingham)

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There has long been a tension in Christianity between economic concerns and providing a way to commune with the sacred. Nowhere was this more apparent in medieval Europe than with the bodies of holy persons (saints’ relics).

These bodies provided pilgrims with a focus, allowing them to direct their devotion to heaven by praying over the relics. But these bodies were not only sacred objects: they were also bought and sold for profit by enterprising merchants and monks who created vast trading networks throughout Western Europe to exchange them.

Because they were human bodies, relics held a special position in the medieval economy. Their value was based in part on their connection to the spirit that had once inhabited the body, or the personality of the saint. But because they were objects (and often highly mobile objects too), relics were commoditised by medieval society – traded, bought and sold for profit by the communities that held them.

This research seeks to improve our understanding of the exchange of Christian relics in France, Belgium and England in the period between 800 and 1200. It uses medieval hagiographies (accounts of saints’ lives) to show that saints’ bodies were moved frequently in medieval Europe.

Monks used existing trade routes and networks to move these relics. They also used merchant connections to maximise the speed of the acquisition, which consequently allowed them to promote their new relics quickly and efficiently. While they did not have a strict monetary value, relics did have value that was based on their usefulness in performing miracles and as a tool to acquire and manage the church’s property.

The research uses the exchange of relics as social tools in return for land and social power to illustrate their value to the Church. When a community acquired an extremely valuable set of relics (such as St Cuthbert in Durham, St Aethelthryth at Ely, St Edmund at Bury St Edmunds or St Thomas Becket at Canterbury), they promoted their new acquisition by touring the relics throughout the region, moving them into sumptuous reliquaries (highly decorated boxes or statues that held the relics) or tombs, and by inviting ecclesiastical and secular dignitaries to watch these movements.

Over time, the relics could become inextricably tied to the place that held them, rendering them useless outside of that society. If that happened, the relics became ‘inalienable’, or could not be traded or exchanged for other items because they could not effectively be valued by the other society.

This research, therefore, argues that relics are best understood as ‘inalienable commodities’, or economic objects that could be traded but which were only valuable in a specific location.

Looking at the economic status of relics in studies such as this gives us valuable insights into the rise of markets in the era before the modern industrial and consumer economy. The medieval economy was not entirely based on a monetary system of exchange, but it was diverse and the objects that circulated within that economy were conceived of by their contemporaries in a myriad of ways.

Research into the status of relics, how they were exchanged, and the economic benefits accrued through their acquisition can have some bearing on modern conceptions of the worth of the human body, as well as the tension between creating capital and promoting the sacred in modern Christianity.

Historical Indian Banking M&A Motivations: Political or Economic?

by Tehreem Husain (The Express Tribune)

British_India_10_Rupees_by_Reserve_Bank_of_India_for_Government_of_Pakistan
British India 10 Rupees by Reserve Bank of India for Government of Pakistan. From Wiki Commons.

 

Over the past few decades rapid strides of financial globalization of capital markets, technological advancement and financial innovation gave rise to an environment supporting large M&A activity arose globally (Smith & Walter, 2002). Market driven business mergers has been an integral part of the commercial and financial history of advanced economies but has only gained recent momentum in the case of emerging markets (Gourlay, Ravishankar & Jones, 2006). This blog delves into an important historical episode of banking merger, perhaps the first ever, in British India where the Presidency banks of Bengal, Bombay and Madras merged into the Imperial Bank of India in 1921. It aims to determine the motivations behind the merger episode which set foundations for a central banking institution in British India.

Banking Merger Episode in British India

In recent times, the financial industry has been witness to major restructuring which amongst other causative factors includes episodes of M&A activity. Merger episodes are not just a recent phenomenon and have existed throughout history. Before discussing the specific merger episode in British India, it is illustrative to shed light on the business of banking in India. Formalized banking commenced in British India with the English agency houses in Calcutta and Bombay which served as bankers to the English East India Company. Up till 1876, the Presidency banks of Bengal, Bombay and Madras established in 1800, 1840 and 1843 respectively, were ‘quasi-public institutions’ managing government balances and being responsible for note circulation. From 1876, they became purely private concerns but still maintained close contact with the government (Rau, 1922).

They provided support to the government during the Great War but towards the end of the Great War, the directors of the Presidency Banks entered into negotiations amongst themselves and later with the government of India for their merger. A Government of India Finance Department Note No.230 of 1919 presented to Edwin Montagu, Secretary of State for India presented a proposal for the amalgamation of the Presidency Banks quoting an increase in capital, increase in branches and improvements in the future management of the rupee debt of India as key advantages from the merger. The Presidency Banks were merged into the Imperial Bank of India in 1921.

 Merger Motivations

 It is important to delve into some of the factors that led to the merger of the Presidency Banks. Historically and more so in today’s dynamic economy, financial corporations and otherwise have undergone restructuring their businesses in order to remain competitive. Norley (2008) defined restructuring as reorganizing the legal, ownership, operational or other structures of a company for the purpose of making it more profitable and better organized for its needs. This restructuring entails activities ranging from mergers and acquisitions to divestitures and spin-offs to reorganization under the protection of national bankruptcy laws (DePamphilis, 2017). In the context of M&A a merger represents the absorption of one company by another whereas an acquisition is the purchase of some portion of one company by another. Mergers occur due to various reasons. Firstly, they generate synergies between the acquirer and the target, which increases the value of the firm (Hitt et al, 2001). Mergers allows firms to capture synergies and improve efficiencies in order to survive economic contractions (Tarsalewska, 2015). Increasing market share, achieving economies of scale and scope, increasing profits and diversification of risk are other motivations behind mergers (Ntuli, 2017).

One other important motivation for merger is due to considerations of economic efficiency (Lin, 2013). Achieving economic efficiency is also a key motivation behind merger motivations in public sector organizations. Mergers can eliminate duplicated responsibilities, utilize synergies and obtain more resource efficiency (Grossman et al., 2012).

It is with this background in mind that the recognized international rating system ‘CAMELS’ was used on the Presidency Banks and the Imperial Bank of India to make sense of whether the inherent financial performance of the banks led to their merger. Individual balance sheets and profit and loss accounts for the three Presidency Banks and the Imperial Bank of India were used for the analysis. Dissecting the ‘CAMELS’ acronym, reveals that the system rates financial institutions based on their capital adequacy, asset quality, management, earnings, liquidity and sensitivity. Working with limited data, financial indicators over a two-decade period from Dec 1910 to Dec 1930 are analysed to make sense of how banks performed on each of these metrics. This approach is not exhaustive but is indicative nonetheless.

Analysing the financial performance of the Presidency banks and the Imperial Bank of India during the time period reveals the following.

  • To determine capital adequacy, the capital to assets ratio was used. In the post-merger episode, the Imperial bank of India witnessed an average capital to assets of 10.7 percent relative to an average of 5.5 percent for the Presidency Banks. This exhibits that through merger, Imperial Bank of India was well capitalized and capital adequacy ratio was improved. Post financial crisis of 2007, the Basel Committee of Banking Supervision has also introduced the leverage ratio to judge capital adequacy. The deposits to equity ratio was used as an indicator to determine the amount of leverage that is used to finance the banks’ assets. The Imperial Bank of India has exhibited a relatively stable leverage position since its inception marking an average of 15.1 percent. This is in contrast to the Bank of Bombay which faced high leverage during the Great War reaching almost 31 percent in December 1917. Keeping all other factors constant, higher leverage ratios indicate higher bank riskiness.
  • In order to judge of asset quality, the investment to total assets ratio is used which focuses on the proportion of total assets that are being invested by banks to protect itself from the risk of non-performing assets (Paul, 2017). Data shows that the merger resulted in an improvement in asset quality based on this indicator. The Imperial Bank of India performed significantly well in comparison to the Presidency Banks. It maintained an average of almost 20 percent from its inception till 1930, compared to an average of 15.5 percent of all three Presidency banks.
  • In terms of profitability, the return on assets and return on equity have been calculated. The ratios measure how profitable are the banks relative to their assets and the net income returned as a percentage of shareholders equity respectively. Both ratios exhibit great fluctuation and variability for the Imperial Bank of India but were on the upward trend for the Presidency Banks. A case in point is the return on equity which stood at an average of 13.4 percent for the Presidency banks compared to 10.1 percent for the Imperial Bank of India. This indicates that the merger did not create additional revenues that could accrue to shareholders as increased equity.
  • In measuring liquidity, the deposits to assets ratio is used. Data shows that through the Presidency banks faced issues on the liquidity front. The ratio, remained within the recommended band of 80 to 90 percent for the Imperial Bank of India whilst touching 78 percent for the Bank of Bengal in December 1919. This shows that the merger resulted in an improved liquidity position for the Imperial Bank of India.

This blog attempts to analyse the merger episode using modern CAMELS indicators. Some of the financial indicators employed have presented a persuasive case for merger as the Bank of Bombay and Madras did not exhibit sound financial fundamentals during the early part of the twentieth century. There was also substantial evidence that the Presidency banks should be merged due to administrative reasons. The financial crisis in British India during 1913-18 were attributed partly due to the exigencies imposed by the Great War and the absence of a financial regulatory body as discussed here. Future research can explore these questions in greater detail.

The merger led to greater ‘financialization’ of British India as the Imperial Bank of India pursued a vigorous policy of opening new branches, specifically in areas where banking facilities did not exist. This can be evidenced from the fact that from 70 branches in 1920, the bank had 202 branches by 1928 (Singh, 1965).

The above discussion primarily employs technical reasons to argue a case for the merger of the Presidency Banks. It would also be quite instructive to explore the political climate at the formation of the Imperial Bank of India and the incentives of the governments both in Britain and in India in doing so.

Slavery in medieval England: broad continuation between the 12th and 17th centuries

by Judith Spicksley (University of York)

Slavery in England had apparently been replaced by serfdom in the twelfth century, yet writers in the sixteenth and seventeenth centuries continue to use terms such as ‘slave’, ‘serf’, and ‘villein’ interchangeably. This research seeks to make sense of this historical conundrum.

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Reeve and serfs in feudal England, c. 1310. From Wikimedia Commons <http://www.wikiwand.com/en/Serfdom&gt;

Historians of medieval England have suggested that slavery had disappeared by the twelfth century. Explanations include the growth of a new notion of chivalric behaviour, and the liberalising effects of an expanding Christianity, in which enslavement of fellow Christians became unthinkable.

But most emphasis has been placed on the effects of economic development, through a combination of technological change, demographic expansion, market growth and a shift in the nature of agricultural production.

In the view of many commentators, serfdom – the system of unfree labour associated with the manorial system – replaced slavery as the main method of restricting the freedom of the individual. Slaves were of unfree status, but serfs, who were given access to land in return for providing a varied mix of labour, goods and cash – were of unfree tenure.

The term ‘serfdom’ has wide application across a range of European manorial systems, but in England, it is usually referred to as ‘villeinage’, since this was the name of the common law institution that developed in the twelfth century.

While there has been considerable debate about the causes of slavery’s decline, there has been much less disagreement about its timing. More recent research has suggested that domestic slaves – mostly women – were retained and underwent something of a revival in southern Mediterranean towns in the later medieval period. There are also examples of young women who were kidnapped and sold as prostitutes in England.

This research suggests that for a number of reasons, we have missed the broader continuation of slavery between the twelfth and seventeenth centuries. In part this is because it did decline, but it also became less visible.

On the one hand, the economic roles undertaken by slaves were no different from those done by individuals who were free. On the other hand, the institution of villeinage used a new language to define itself: the unfree were villeins, bondmen and nativi, and were not identified as ‘slaves’.

It is also clear that there was an overlap between unfree status and unfree tenure that has not yet been adequately investigated. Later histories have been heavily influenced both by the transatlantic slave trade, which provided an unforgettable image of the ‘slave’, and by the emergence of two major theoretical approaches: classical economic theory; and the Marxian materialist dialectic.

Together these factors have been instrumental in bringing about a reluctance to translate the Latin word servus as ‘slave’ in the legal texts, literature and documentary evidence of late medieval England, and give preference instead to the language of villeinage.

Slavery may have changed its appearance in the late medieval period, but in law, little had changed. Those of unfree status still owned nothing, could devise nothing and were at the will of their lords; moreover, their children inherited their unfree status.

PRE-REFORMATION ROOTS OF THE PROTESTANT ETHIC: Evidence of a nine centuries old belief in the virtues of hard work stimulating economic growth

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Cistercians at work in a detail from the Life of St. Bernard of Clairvaux, illustrated by Jörg Breu the Elder (1500). From Wikimedia Commons <https://en.wikipedia.org/wiki/Cistercians&gt;

Max Weber’s well-known conception of the ‘Protestant ethic’ was not uniquely Protestant: according to this research published in the September 2017 issue of the Economic Journal, Protestant beliefs in the virtues of hard work and thrift have pre-Reformation roots.

The Order of Cistercians – a Catholic order that spread across Europe 900 years ago – did exactly what the Protestant Reformation is supposed to have done four centuries later: the Order stimulated economic growth by instigating an improved work ethic in local populations.

What’s more, the impact of this work ethic survives today: people living in parts of Europe that were home to Cistercian monasteries more than 500 years ago tend to regard hard work and thrift as more important compared with people living in regions that were not home to Cistercians in the past.

The researchers begin their analysis with an event that has recently been commemorated in several countries across Europe. Exactly 500 years ago, Martin Luther allegedly nailed 95 theses to the door of the Castle Church in Wittenberg, and thereby established Protestantism.

Whether the emergence of Protestantism had enduring consequences has long been debated by social scientists. One of the most influential sociologists, Max Weber, famously argued that the Protestant Reformation was instrumental in facilitating the rise of capitalism in Western Europe.

In contrast to Catholicism, Weber said, Protestantism commends the virtues of hard work and thrift. These values, which he referred to as the Protestant ethic, laid the foundation for the eventual rise of modern capitalism.

But was Weber right? The new study suggests that Weber was right in stressing the importance of a cultural appreciation of hard work and thrift, but quite likely wrong in tracing the origins of these values to the Protestant Reformation.

The researchers use a theoretical model to demonstrate how a small group of people with a relatively strong work ethic – the Cistercians – could plausibly have improved the average work ethic of an entire population within the span of 500 years.

The researchers then test the theory statistically using historical county data from England, where the Cistercians arrived in the twelfth century. England is of particular interest as it has high quality historical data and because, centuries later, it became the epicentre of the Industrial Revolution.

The researchers document that English counties with more Cistercian monasteries experienced faster population growth – a leading measure of economic growth in pre-modern times. The data reveal that this is not simply because the monks were good at choosing locations that would have prospered regardless.

The researchers even detect an impact on economic growth centuries after the king closed down all the monasteries and seized their wealth on the eve of the Protestant Reformation. Thus, the legacy of the monks cannot simply be the wealth that they left behind.

Instead, the monks seem to have left an imprint on the cultural values of the population. To document this, the researchers combine historical data on the location of Cistercian monasteries with a contemporary dataset on the cultural values of individuals across Europe.

They find that people living in regions in Europe that were home to Cistercian monasteries more than 500 years ago reveal different cultural values than those living in other regions. In particular, these individuals tend to regard hard work and thrift as more important compared with people living in regions that were not home to Cistercians in the past.

This study is not the first to question Max Weber’s influential hypothesis. While the majority of statistical analyses show that Protestant regions are more prosperous than others, the reason for this may not be the Protestant ethic as emphasised by Weber.

For example, a study by the economists Sascha Becker and Ludger Woessman demonstrates that Protestant regions of Prussia prospered more than others because of the improved schooling that followed from the instructions of Martin Luther, who encouraged Christians to learn to read so that they could study the Bible.

 

‘Pre-Reformation Roots of the Protestant Ethic’ by Thomas Barnebeck Andersen, Jeanet Bentzen, Carl-Johan Dalgaard and Paul Sharp is published in the September 2017 issue of the Economic Journal.

Thomas Barnebeck Andersen and Paul Richard Sharp are at the University of Southern Denmark. Jeanet Sinding Bentzen and Carl-Johan Dalgaard are at the University of Copenhagen.