‘Quakers, Coercion and pre-modern Growth: Why Friends’ Formal Institutions for Contract Enforcement Did Not Matter for Early Modern Trade Expansion’

by Ester Sahle (University of Bremen)

barclays_bank_limited_signIn the wake of the Libor scandal in 2012, Barclay’s bank suffered severe reputational damage. In response, its CEO promised a return to the bank’s Quaker roots. With this he referred to Barclay’s history as a Quaker-founded bank, and the proverbial Quaker honesty. The idea of the honest Quaker businessman is part of popular culture and historians have argued that honesty in business was an inherent trait of Quakerism from its beginnings.

The Society of Friends, learned opinion would have it, disowned culpable bankrupts. Thereby, it created an incentive for Friends to be honest in their conduct of business. The empirical basis for these claims however is curiously thin. The literature cites few actual instances of disownments for business-related offences from the seventeenth and eighteenth centuries. Most known cases stem from the nineteenth century, when this was indeed common practice. The story of Quaker business honesty is thus based on a strong assumption of institutional and cultural continuity.

The Library of the Society of Friends holds records of London Quaker meetings dating back to the 1660s, when Friends first appeared in the capital. Consulting Quaker meetings’ minutes, disciplinary records, as well as journals and letters of London Quaker businessmen, I conducted the first large scale empirical study of London Quaker meeting’s attitudes towards debt and bankruptcy, c.1660 – 1800.

Surprisingly, these meetings rarely sanctioned business offenders prior to the 1750s. For about 100 years after its conception, the Society of Friends showed no particular interest in its members’ conduct of business. What is more, the letters and diaries of Quaker businessmen in this period contain no evidence that that they feared repercussions from the Society. Quaker businessmen in financial difficulties discussed their impending bankruptcy procedures, or fear of being incarcerated for debt. The possibility of disownment from the Society however, did not figure among their concerns. This indicates that the punishment of offenders was not common enough to work as a deterrence.

From the 1750s onwards, however, this changed. Numbers of disownments for business-related offences skyrocketed. The last decades of the eighteenth century saw far more disownments for business-related offences than the 100 years before.

What caused this change? The new emphasis on honesty in business was part of the Quaker reformation, a movement within Quakerism which refocused the sect’s ideals. Reform movements within religious denominations are not uncommon, what set the Quaker reformation apart was its stated emphasis on protecting the Society’s reputation, and focus on business conduct.

These priorities were a response to a political crisis of the 1750s, which took place in the Quaker-founded colony of Pennsylvania. Erupting over internal disagreements about who was to cover the expenses for the colony’s defense during the Seven Years War, it led to a public scandal which shook Quakerism across the Atlantic World. Contemporary media accused the Quakers of failing to protect the colony’s population from French soldiers and native American raiders. Quaker politicians supposed motivation, their pacifist doctrine was merely a mask for selfish greed. Pamphlets published in London attacked individual Quaker businessmen as war profiteers, who were accumulating fortunes at the expense of the lives of innocent civilians.

In other words, just like Barclay’s Bank in the 21st century, the mid-eighteenth century Quakerism suffered severe reputational damage. The sect’s new focus on honesty in business was a response to this. The Society of Friends conducted an exercise of corporate responsibility, which was a tremendous success – so successful that 250 years later, Quakerism and honesty remain inseparable in the minds of lay people and Historians alike.

Friends went on to become leaders in important ethical concerns, such as the abolition of the slave trade. Today, the Society of Friends indeed stands for an exceptional ethical approach to many areas of public life. What this story tells us is that taking action against reputational damage can lead to institutional change. And institutions shape culture. In other words, corporate social responsibility can indeed lead to a better conduct of business, to the benefit of society as a whole.


What is a market crash?

by David Le Bris (Toulouse Business School)


Despite the importance of the phenomenon, there is no clear definition of what is a market crash. Arguably, market crashes should be related to important news but it is frequently difficult to effectively match historical events with market reactions. For instance, when WWI started in July 1914, the French stock index decreased by a modest 7.14 %; a monthly drop ranked only the 105th in the French stock market history. But, a given fall in percent has a stronger impact on a stable market than it does upon a highly volatile one. A crash is not solely a given percentage decrease but represents a significant discrepancy compared to what has been previously observed.

Thus, crashes need to be identified after having taken into account the prior financial context. I propose a simple new tool to identify market crashes by measuring price variations in numbers of standard deviations of the preceding period rather than in percent. French stock market was used to a low volatility before 1914, thus the modest decrease of 7.14 % represents a fall of 6.09 standard deviations, which is the second worst case in French history. This ranking is much more consistent with history.

In a paper (forthcoming in Economic History Review), this method is applied to long term series of US and French stock prices and UK state bonds. This new tool offers a renewed story of the financial shocks. A better match between crashes and historical events is achieved than with pure price variations. Events that were financially insignificant when measured in percent become important crashes after adjustment for volatility. This improved matching brings new insights to several historical debates.

Consistent with other historical sources pointing out the severity of the 1847 crisis, this episode appears to be in the top ten crashes of the UK bond market whereas it ranks 102th in pure price variations. The start of the American Civil War caused a significant crash, supporting the cost side in the cost/advantage debate about this conflict. The Berlin conference dividing up Africa caused a considerable fall in UK bonds, as if the market took account of the future cost of African colonization for UK public finances. Pre-1914 wars (Franco-Prussian, Russo-Ottoman, Boxer Rebellion in China, Boer War, etc.) led to many crashes on both the French stock and UK bond markets, supporting the traditional narrative of the importance of these confrontations despite the weak price changes they caused in this era of low volatility.

Turning to the 20th century, the outbreak of WWI caused major crashes in both French stock and UK bond markets, mitigating the view of sleepwalking to disaster. It is not possible to distinguish more crashes before than after the creation of the Fed in 1913, whose role in stabilizing financial markets is still being questioned. Two crashes in France during the 1920s caused by monetary issues support analysis of French monetary policy as an important factor in the interwar troubles. Hot episodes of the cold war caused crashes on the US and French stock markets, which is consistent with narratives of the risk of disasters incurred at this time. There was no crash on the French stock and UK bond markets in 1929, supporting the views of a transmission of the Great Depression to Europe through other channels than financial markets. The 2008 crisis differs on this point because both French and US stock markets fell strongly.

Maybe, our understanding of financial mechanisms could be enriched thanks to this new tool.

Le Bris, David, What Is a Market Crash? (March 1, 2016). Economic History Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1328305 or http://dx.doi.org/10.2139/ssrn.1328305

Myth, history and counter-history of the creation of an Italian national market

by Maria Stella Chiaruttini (European University Institute)


The ducat was the main currency of the Kingdom of the Two Sicilies between 1816 and 1860

Risorgimento history and mythology have, from the very beginning, been a cornerstone of Italian nation building and are still informing public rhetoric and education. However, while their predominance in public discourse has decreased over the last few decades, stereotypical views of Italian unification have begun to be increasingly and vociferously called into question, especially in the South, by cultural associations and popular history writers. Opposing the nineteenth-century interpretation of the messianic role played by Piedmontese patriots and institutions in unifying the country, they highlight the shortcomings of Italian unification, advocating a ‘counter-history’ of the Risorgimento in which the South is portrayed as the hapless victim of ruthless colonizers.

This picture is most provocatively put forward in L’invenzione del Mezzogiorno by the journalist and political activist Nicola Zitara (Jaca Book, 2011). The book, based on secondary literature and addressing a non-academic audience in an extremely polemical style, traces back the origins of the North-South divide to the pillage of the South by a gang of Northern robber bankers. Though lacking in scientific rigor and fairness, it has the merit of addressing one of the – surprisingly – least studied aspects of the Italian ‘Southern question’, namely the financial one. It is indeed high time to open a historical debate on the financial divide still characteristic of today’s Italy. Even more importantly, the financial history of the Risorgimento can offer new insights into two major contemporary issues: economic regionalism, recently come to the forefront with Brexit and the Catalan crisis, and the nexus between finance and politics that emerges constantly in the ongoing EU crisis.

As part of a larger project on Italian financial integration during the Risorgimento, this research focusses on the early development of modern financial markets in the Kingdom of Sardinia and the Two Sicilies and their clash in the first years after Unification. On the basis of extensive archival research, it questions both the traditional view of Southern backwardness versus Northern progress and the revisionist stance praising the superiority of the old Southern system. Apart from the huge differences between the financial systems of the former Italian states, which make the very concept of a financial ‘North’ meaningless, this study shows the crucial role that political events played in shaping financial markets in the Two Sicilies and Piedmont-Sardinia, determining comparative advantages and disadvantages that would prove crucial after 1861.

Interestingly, both kingdoms faced sovereign default, although at different stages. The Two Sicilies came close to bankruptcy in the early nineteenth century, when public debt, already high due to the Napoleonic wars and the expensive restoration of the Bourbon dynasty, skyrocketed after the 1820 constitutional uprisings were crushed by a long and costly Austrian military occupation. From then on, the constant concern of the Bourbons was the repayment of foreign debt. To this end, they consistently implemented an austerity policy which, coupled with the political and financial troubles of 1848, delayed any major banking reforms for decades. At the same time, however, the Southern public national bank, the Bank of the Two Sicilies, managed a sophisticated cashless payment system countrywide that, although working less smoothly than is usually assumed, helped to finance public debt while ensuring monetary stability. Moreover, the role played by Southern business elites in consolidating a model of financial development which favoured Naples at the expense of the rest of the country should not be overlooked.

The rather primitive financial system of the Kingdom of Sardinia was, on the contrary, completely overhauled in less than one decade to sustain the war effort during the disastrous First War of Independence (1848–49), pay for war reparations and enable Prime Minister Cavour to pursue his expansionary policies. From 1848 on, the Piedmontese government found its closest ally in an initially modest bank of issue, the Bank of Genoa, later National Bank and forerunner of the Bank of Italy. Under Cavour’s leadership and with the support of a dynamic business elite, a complex credit system closely integrated with the international markets emerged – a system, however, plagued by large-scale speculation and dependent on both government support and foreign patronage.

The first few years after Unification were particularly traumatic for the South, although not unequivocally negative from the point of view of financial development. The region suffered heavily from monetary and credit disruptions due to warfare, the ever-increasing burden of Italian public debt with its corollary of note inconvertibility, and the decrease of its political and economic power within the new state. The expansion of the Piedmontese National Bank dealt a fatal blow to the Bank of Naples, as the Bourbons’ bank was renamed. At the same time, however, it encouraged the latter to update its business model and the provinces benefited from the creation of a branch network first by the National Bank and later by the Bank of Naples. However, banking competition also came at the cost of financial instability, since, due to bitter regional antagonism, Italy constantly swung between banking pluralism and de facto note monopoly until the early twentieth century. By analysing the feud between the National Bank and the Bank of Naples, this study also shows how the ‘constructed identity’ of the two banks was instrumental to the private interests of their respective business groups, giving rise to conflicting narratives still in currency today.

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.


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


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. 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.

ORIGINS OF BRITAIN’S HOUSING CRISIS: ‘Stop-go’ policy and the covert restriction of private residential house-building

by Peter Scott and James T. Walker (Henley Business School at the University of Reading)

University of the West of England, The History of Council Housing. Copyright of Bristol Record Office

‘Stop-go’ aggregate demand management policy represents one of the most distinctive, and controversial, aspects of British macroeconomic policy during the post-war ‘long boom’. This was, in turn, linked to an over-riding priority among an influential section of policy-makers in the Treasury and the Bank of England to restore sterling as a ‘strong’ currency (second only to the dollar) and to re-establish the City of London as a major financial and trading centre, despite heavy war-time debts and low currency reserves.

This policy is often viewed as having had damaging impacts on major sectors of the British economy – especially the manufacture of cars, white goods and other consumer durables, which were deliberately depressed in order to support sterling and thereby facilitate the growth of Britain’s financial sector.

This research explores an important but neglected impact of ‘stop-go’ policy: restrictions on house-building. This has been overlooked in the general stop-go literature, largely because the policy was mainly undertaken covertly, without public announcement or parliamentary discussion.

In addition to publicly announced restrictions on public sector house-building – by restricting local authority borrowing and raising interest rates on that borrowing – the government covertly depressed private house purchases and mortgage lending by restricting house mortgage funds to well below market clearing levels.

The Treasury used a combination of informal pressure and, less frequently, formal requests, to get the building societies’ cartel (the Building Societies Association) to set their interest rates at levels that forced them to ration mortgage lending in order to maintain acceptable reserves. Officials particularly valued this instrument of stop-go policy owing to its effectiveness and its ‘invisibility’ (mortgage lending restriction was not publicly announced and was not generally even subject to cabinet discussion).

Meanwhile political pressure for action to increase house-building and home ownership (especially in the run-up to national elections) led to a perverse situation whereby government was sometimes simultaneously boosting demand for house purchases and covertly restricting the supply of mortgages – feeding into a growing house price spiral that has become an enduring characteristic of the British housing market.

This study shows that the application of stop-go policy to mortgage lending for most of the period between the mid-1950s and the late 1970s had a major cumulative impact on the British economy: depressing the long-term rate of capital formation in housing; creating inflationary expectations for house purchasers; having negative impacts on living standards (especially for lower-income families); and damaging the growth, productivity, and capacity of the house-building sector and the building society movement.

Democracy and taxation in Greece: a long history of rural favouritism

by Pantelis Kammas (University of Ioannina) and Vassilis Sarantides (University of Sheffield)


Some of the basic characteristics of the current tax system in Greece seem to have deep historical roots. One is the amazingly low tax burden that has fallen on the incomes of the agricultural population throughout the history of the Greek state.

This is because governing authorities always keep an eye on the welfare of the politically powerful group of peasants and farmers to gain support. Another deep-rooted characteristic is significant reliance on indirect versus direct taxes, which can be attributed to analogous political economy reasons.

The main concern of the governing authorities in the agrarian new-born Greek state of the nineteenth century was the legitimisation of their authority. On this basis, a number of economic benefits through tax (and other) policies were provided to the rural population that became politically powerful after 1864, the date that voting rights were granted to all adult males.

In that way, authorities aimed to ensure a minimum level of social consensus and to convince the citizens of the young Greek state that the public demands of the war of Independence – ‘social justice’, ‘democracy’ and ‘equality of political rights’ – would be satisfied.

This research highlights the importance of economic development in the relationship between democracy and taxation, focusing mainly in the case of Greece during the nineteenth and early twentieth century. Notably, Greece established universal male suffrage in 1864 while it was still a developing, pure agrarian economy with 76% of the population in the agricultural sector.

In contrast with Greece, other democratic European countries had significantly narrower agricultural sectors in the nineteenth century – the majority of them at a level below 40% of the total working population.

Building on a unique tax dataset that contains 13 different tax categories of the newborn Greek state during the period 1833-1933, the results conclude that the extension of the voting franchise in 1864 did not affect the size of the government – but it did change the structure of taxation in favour of the rural population.

Universal male suffrage was accompanied by a long-run reduction in the percentage of rural (for example, taxes on land) to total taxes by 8.25%. This reduction was balanced by increases in indirect taxes – mostly custom and excises duties – leaving the overall level of taxation constant over time.

The research interprets these empirical findings in terms of a political economy motivation. In particular, the Greek governments changed the composition of taxation, reducing rural taxes to satisfy the large majority of the electorate who were poor peasants and farmers.

In turn, the findings for Greece are compared with that for a sample of 12 West European countries that were substantially more developed on democratisation.

The analysis suggests that in more industrialised European economies, democratisation revealed the political preferences of a more urbanised electorate – mostly consisting of workers and middle class capitalists – leading to a different pattern of ‘reshapement’ of the tax system.

This is consistent with the theoretical priors that the level of development, and the consequent structure of the economy, will result in a differentiated effect of democratisation on fiscal policy.


Ottoman stock returns during the Turco-Italian and Balkan Wars of 1910-1914

by Avni önder Hanedar (Dokuz Eylül University and Sakarya University, Turkey) and Elmas Yaldız Hanedar (Yeditepe University, Turkey)


Were the military conflicts of 19101914 related to higher risks for market investors at the İstanbul Stock Exchange? Wars are often perceived as bad news, correlated with increasing risks for investors and fluctuations in volatility: there would be fall in stock prices due to expected macroeconomic costs, such as higher inflation and lower production, as companies’ activities and expected returns decrease. On the other hand, if wars’ outcomes were perceived as unimportant for companies’ activities and expected returns, then there would be no significant changes in stock prices and volatility.

Many researchers on financial economics have created a large literature on the effects of different wars, and addressed mixed findings. A pioneering research for the political crises of 1880–1914 is Ferguson (2006), contributing to answering how did investors at the London Stock Exchange view the conflicts on the eve of the First World War. He showed the absence of higher war risk on bonds of Great Powers[1] traded on the London Stock Exchange. In addition, Hanedar et al. (2015) evince that the outbreak of the Turco-Italian and Balkan wars were correlated with a lower likelihood of Ottoman debt repayments, using data on two Ottoman government bonds traded on the İstanbul bourse. As the literature on the İstanbul bourse is limited, new light on this question required to explore risk perceived by stock investors due to the historical conflicts.

A column of Tanin presenting the value of bonds and stocks on 14 November 1910

We focus on the influence of stock returns at the İstanbul bourse during the Turco-Italian and Balkan wars, using unique data on stock prices of 9 popular domestic joint-stock companies in the Ottoman Empire. All these companies played a crucial role for the Ottoman economy and operated in the most attractive sectors, i.e. banking, mining, agriculture, and transportation. Some of them are the Ottoman General Insurance company (Osmanlı Sigorta Şirket-i Umûmiyesi), the Regie (Tobacco) company (Tütün Rejisi), and the Imperial Ottoman Bank (Bank-ı Osmanî-i Şâhâne). The data are manually collected from Tanin, which was a widely circulated daily Ottoman newspaper. This research is the first to provide a historical narrative explaining the changes of Ottoman stock returns due to the wars that took place on the eve of the First World War. It observes only small reactions to the Turco-Italian war, and only for three stocks out of ten examined (see Table 1). This is interesting, as previously (Hanedar et al., 2015) we observed higher responsiveness of government bond prices during the same period.



It would be possible to argue that investors might have believed that the war would not be that harmful for the non-governmental economic and financial sectors. An important aspect supporting the finding is that the companies were either established or supported by foreign investors. Great Powers protected their home countries’ investments both economically and politically. The companies obtained revenue guarantees and privileges from the Ottoman state, making the investors’ investments secure. Great Powers that invested in the Ottoman Empire were expecting its demise soon. Therefore, investors were likely to invest in the companies just for the sake of having territorial claim without much consideration of risk. During the nineteenth century, wars were important sources of the solvency problem, which could explain the sensitivity of government bond prices to the conflicts studied here.

The working paper can be downloaded here

References to this blog post here

[1] The UK, France, Germany, Italy, and Austria-Hungary.

Do the rules of the game matter? Monetary regimes and financial stability since 1920

by German Forero-Laverde (Universidad Externado de Colombia / Universitat de Barcelona)

Financial crises come in many shapes and forms. They can occur in stock markets, private or public debt markets, housing markets or any asset class you may think of (yes, even tulips). Attempts to predict the timing and asset class where the next crisis will show its ugly head have been unsuccessful in part due to the amount and diversity of forces at play. The veil of uncertainty that surrounds them and the negative effect they have on long-run economic growth makes the study of crises both pertinent and challenging.

The research, presented at the 2017 EHS annual conference, studies one possible factor that may be related to the frequency and intensity of booms and busts in stock and credit markets: the rules of the game. It studies the possibility that the monetary regime, competing decisions on monetary policy, exchange rates and capital flows, is related to the evolution of financial aggregates to different time horizons. The underlying idea, following the Bank for International Settlements, is that different regimes endow the financial system with varying levels of elasticity, allowing for imbalances to accumulate in the form of booms and unwind in the form of crises at different rates and intensity.

This is a stepping stone in the road to answer a question that has troubled policy makers for over a century: Should authorities and regulators intervene in the market trying to anticipate crisis, or is the best course of action to react once crises ensue? If regimes do play a role, and the channels of accumulation of imbalances are contingent on the institutions at play, it is possible that authorities may have a wider array of tools at their disposal to avoid the accumulation of financial stability.

In order to do it, the research proposes three new measures for the evolution of the stock market and credit aggregates since 1922 until today for France, Germany, Italy, the Netherlands, Sweden and the UK. The new measures, the Boom Bust Indicators – BBIs, result from a variation on our earlier work, and allow us to characterize booms and busts depending on their effects to different horizons: explosive ones affect the short-run (up to one year); expansive ones have an effect up to the third year; and pervasive ones show effects after 5 years.

BBIs complement what has been traditionally done in the financial crisis literature. They depart from decomposition techniques such as spectral analysis in that they use all the information in the original series instead of extracting a part of the data. They depart from turning point analysis and other crises dating techniques since the outcome is a triplet of continuous series instead of a summary sequence of dates for booms and crashes. They complement measures like the severity index which pays unduly little attention to explosive booms and busts to the benefit of lengthier events. Finally, the measures allows for comparisons across countries and time. A sample of the three measures for the UK stock market is presented in Figure 1.

Figure 1: Boom Bust Indicator for the UK stock market 1922-2015

Forero-Laverde - Figure 1

The research studies the evolution of BBIs for credit and stock markets under five different regimes: the gold exchange standard (GES), the fixed peg rate of Bretton Woods (PEG), the managed float of the Exchange Rate Mechanism (MF), the periods of free floatation (FF) and the European Monetary Union (EMU). To characterize the differences in behavior under each regime we pool all countries together and measure the statistically significant differences in means and volatility for BBIs under each regime. They were graphed in a scatter plot, where the X axis represents volatility and the Y axis represents the mean. Results for the long-run measure are presented in Figure 2. The farther a regime appears from the origin, the more elastic it is as it coincides with stronger variability in the indicator.

Figure 2: Regimes according to mean value and volatility of long-run BBIs

Forero-Laverde - Figure 2

Although the mechanisms through which the regime impinges on the boom-bust cycle of credit and stocks still remains unclear, it is possible to highlight several findings. First, there is a role for the monetary regime on the evolution of asset prices and credit. Second, some sort of currency peg, with commitments to exchange rate stability and capital controls, favors financial stability both in the short and long run. However, stricter pegs are favorable for controlling stock market booms but increase both short run and medium run volatility of credit growth. Finally, a nominal anchor of the currency, through the gold exchange standard or the European Monetary Union, appears to be insufficient in generating financial stability as they coincide with booms and heightened volatility in stock and credit markets.


Religion and economics: early Methodism was underpinned by sophisticated financial management

by Clive Norris (Oxford Centre for Methodism and Church History, Oxford Brookes University)


John Wesley’s efforts to spread the Gospel throughout the British Isles and beyond in the later eighteenth century relied on resources generated and managed using a wide range of techniques. This study of contemporary financial records shows that the evangelistic energy and fervour of Methodist preachers and members was supported – but also frequently constrained – by the movement’s approach to financial management.

The central priority of Wesley’s movement or ‘Connexion’ was to supply enough preachers to meet the needs of the membership and attract new converts. Members’ dues provided the core financing for the growing cadre of travelling preachers, while tools such as central grants channelled resources from richer to poorer areas.

Although the increasing number of married preachers with children raised per capita costs, the annual preachers’ conference tried to keep the deployment of preachers within the envelope of the resources available. By 1800, preaching costs probably exceeded £40,000 a year, met by around 110,000 members.

A second preoccupation was the capital and revenue funding of the expanding network of Wesleyan chapels, which numbered almost one thousand by 1800, costing perhaps £9,000 in annual debt interest alone.

From the 1760s, increasing use was made of an essentially commercial model, overseen by a central committee of business advisers. The opportunity to provide loans at attractive interest rates was offered to wealthier members and supporters, and these both financed chapel construction and offered a good home for their surplus funds. Interest costs were met by renting out seats in chapel, though some seats were always made available free to the poor.

Proposals for new chapels were reviewed annually by the Wesleyan conference, and although many were built without its approval, the resulting pressure on the movement’s finances became marked only after 1800. Chapels also enabled the Connexion to draw income from non-members, who typically outnumbered members by three to one in congregations.

Third, Wesleyan Methodists sought to spread the Gospel through the publication and distribution of cheap and readable publications, including Charles Wesley’s hymnals.

From the 1750s, the so-called Book Room became increasingly profitable, largely because by 1780, almost every aspect of production and distribution had been brought in-house. In particular, Wesleyan preachers were exhorted to market the publications to their members and congregations, and received 10% commission on sales. By 1800, the Book Room’s profits – typically £2,000 annually – were making a significant contribution to overall Connexional finances.

Fourth, the Connexion developed a portfolio of other activities, including educational services such as Sunday schools, poor relief programmes and overseas missions, especially in the West Indies. Most of these activities were not financed directly by the membership.

A key approach was to appeal for public subscriptions, which were widely used outside Methodism to fund public buildings and services such as hospitals, but there were many variations. In the West Indies, for example, some Wesleyan missionaries supplied spiritual services to slave-owners under contract.

One major result of these developments was that the Wesleyan Methodist movement became increasingly dependent on its richer members and supporters. For example, though its areas of greatest membership strength were Yorkshire and the South West of England, subscription income came disproportionately from wealthy London.

But until well into the nineteenth century, this seems not to have blunted its expansion: membership almost doubled between 1800 and 1820. Indeed, the complex and flexible financial policies and practices that underpinned the movement were crucially important in enabling it to respond to the spiritual and (to an extent) material needs of Britain’s growing and geographically shifting population.