How did investors view the reforms and supervisory organisations of the late nineteenth century?

by Avni Önder Hanedar (Sakarya University)

In the last couple of decades, high debt burden in emerging economies created financial crises and the low growth rate during the 2008 financial crisis led to a default problem for Greece. Some reforms were proposed, such as institutional changes and the establishment of an entity under control of the other Eurozone members to supervise the repayment of debts. These events have some similarities with the default of the Ottoman Empire and the establishment of the Ottoman Public Debt Administration (OPDA) (Düyun-u Umumiye). To deal with the inefficiencies in the Ottoman economy and political system, reforms were implemented, as supervisory organizations were established during the nineteenth century. Important ones were the adoption of the gold standard in 1880, the Administration of Six Indirect Revenues (Rüsum-u Sitte) (ASIR) in 1879, and the OPDA in 1881. It seems that many of them were not seen by investors as promising, since a British weekly magazine, Punch or The London Charivari, illustrated these events as bubbles. A paper of  Elmas Yaldız Hanedar, Avni Önder Hanedar, and Ferdi Çelikay examined how such events were perceived at the İstanbul bourse, which could shed light on today’s realities.

Cartoon of Punch or The London Charivari on 6 January 1877 about the Ottoman reforms.a caption


The paper manually collected historical data on the price of the General Debt bond traded at the İstanbul bourse between 1873 and 1883 from volumes of daily Ottoman newspapers, i.e., Basiret, Ceride-i Havadis, and Vakit. This bond was the most actively traded one at the İstanbul bourse in 1881, during the foundation of the OPDA.

A column of Vakit pointing out the values of bonds, stocks, and foreign currencies at the İstanbul bourse on 6 October 1875 (Vakit. (6 October 1875). Sarafiye, Galata piyasası, 2)

The paper is the first to measure in econometrically sophisticated manner investors’ beliefs at the İstanbul bourse in reference to the reforms and financial control organizations. Historical research does not include detailed empirical information for the effects of reforms and financial control organizations on the İstanbul bourse during the default period. Using unique data on the most actively traded Ottoman government bond, the paper extends the historical literature on the İstanbul bourse (See Hanedar et al. (2017)) and reforms (See Mauro et al. (2006), Birdal (2010), Mitchener and Weidenmier (2010) looking at bond markets in multiple developing countries, with samples that include the Ottoman Empire).

The methodology in the paper was to analyse the variance of returns (derived from the price showed in above) as a proxy of financial instabilities and risks. To model volatility, the paper estimated a GARCH model with dummy variables for reforms and financial control organizations at and after the dates of the events (i.e., short- and long-run).







The General Debt bond price (Turkish Liras) and key events. The data are derived from Vakit, Ceride-i Havadis, and Basiret, 187383.

The empirical results indicated a permanent decrease in volatility after the establishment of the OPDA and the gold standard. The foundation of a locally controlled finance commission in 1874 was correlated with a lower volatility level at the date of the event, but increased volatility in the long term. The Ottoman case is instructive for the understanding of today’s economic situation in emerging markets such as Greece, while it could be argued that long-lived and comprehensive measures with foreign creditors’ supervision on fiscal and monetary systems matter more for investors’ perceptions. Lowering government interventions on economic system and transaction costs due to bimetallism were viewed as promising. Investor beliefs that the local and short-lived reforms and supervisory organizations were ineffective could be due to several factors such as lack of measures to limit public expenditures.


Volatility changes in the General Debt bond return, 1873–83. * and *** denote statistically significant coefficients at 10% and 1%.



Vakit. (6 October 1875). Sarafiye, Galata piyasası, 2.

Birdal, M. (2010). The Political economy of Ottoman public debt, insolvency and European control in the late nineteenth century. London: I. B. Tauris and Co Ltd.

Hanedar, A. Ö., Hanedar, E. Y., Torun, E., & Ertuğrul, H. M. (2017). Dissolution of an Empire: Insights from the İstanbul Bourse and the Ottoman War Bond. Defence and Peace Economics, (Forthcoming).

Mauro, P., Sussman, N., & Yafeh, Y. (2006). Emerging markets and financial globalization: Sovereign bond spreads in 1870-1913 and today. Oxford: Oxford University press.

Mitchener, K. J. & Weidenmier, M. D. (2010). Super sanctions and sovereign debt repayment. Journal of International Money and Finance, 29(1), 19–36.

A Brief Monetary History of Ireland

by Seán Kenny (Lund University) and Jason Lennard (Lund University and National Institute of Economic and Social Research)


The Irish Famine of the 1840s is one of the great tragedies of history. Beginning with a bout of potato blight, the Irish population subsequently declined by 20 per cent between the censuses of 1841 and 1851 and has never recovered (O’Rourke, 1991). How did an agricultural shock have such devastating effects? Lynch and Vaizey (1960) argue that a lack of monetization facilitated self-dependence and barter, leaving the Irish economy vulnerable to exogenous shocks like the Famine.

In a forthcoming paper in the Economic History Review available here, we constructed new monthly estimates of the narrow money supply and annual estimates of the broad money supply between 1840 and 1921. The aggregates were constructed from a range of archival sources and contemporary publications. A major task was to reconstruct the Irish coin supply. We did this by tracking shipments of coin between the Royal Mint and Irish banks using records held at the National Archives. These flows were then added to stocks, which were either recalculated from contemporary estimates or based on recoinages.

A number of interesting results emerge from the data. First, we find that, by standard measures, Ireland was no backwater, but well monetized on the eve of the Famine. Not only was it more monetized than other European countries for which data is available, such as Norway and Sweden, it was decades ahead of others, such as Germany and the Netherlands. The new data is therefore at odds with the Lynch and Vaizey hypothesis.

A second major finding is the scale of the collapse in the money supply during the Great Famine. This monetary contraction was the largest during any event in the economic history of Ireland since 1840 and perhaps one of the deepest in economic history more generally. Currency in the hands of the public, the nation’s liquidity, collapsed by more than half, the monetary base (currency in the hands of the public plus reserves) by 48 per cent and the broad money supply (currency in the hands of the public plus net deposits) by 27 per cent.

Figure 1. The Great Famine versus the Great Contraction
Notes: Ireland indexed to 1846 = 100. US indexed to 1928 = 100. Year end.
Sources: Kenny and Lennard, ‘Monetary aggregates for Ireland’; Friedman and Schwartz, Monetary history.


Figure 1 plots the narrow (M0) and broad (M3) money supplies in Ireland during the Great Famine against equivalent measures for the United States during the Great Depression. As can be seen in this tale of two crises, the narrow money supply slumped much deeper during the Great Famine than in the Great Contraction. The broad money supply initially declined more steeply in Ireland than in the US. However, the Irish recovery was underway from 1849, while the American contraction continued until 1933.

This new data shines a light on Ireland’s statistical Dark Age, allowing us to revisit old hypotheses and others to develop new ones. On the monetary origins of the Great Famine, we found that Ireland was no less monetized than its European peer group. The Famine did, however, unleash the Great Irish Contraction, during which the money supply drastically slumped.


To contact the authors:



Friedman, M. and Schwartz, A. J., A monetary history of the United States, 1867–1960 (Princeton, NJ, 1963).

Kenny, S. and Lennard, J., ‘Monetary aggregates for Ireland, 1840–1921’, Economic History Review (2017).

Lynch, P. and Vaizey, J., Guinness’s brewery in the Irish economy, 1759–1876 (1960).

O’Rourke, K. H., ‘Did the Great Irish Famine matter?’, Journal of Economic History, 51 (1991), pp. 1–22.

EHS 2018 special: Long-term effects of financial crises

by Chenzi Xu (Harvard University)


The global financial crisis of 2008 was not unique. It had a precedent in the London banking crisis of 1866. Just as in 2008, the crisis began in the core financial market and spread to the periphery, the same happened in 1866.

The 1866 crisis has only been studied as a purely British event, but my research presents new evidence that it was a global financial crisis on the scale of 2008’s. The cities around the world that depended on British banks that happened to fail in London suffered immediate losses in exports activity. These losses took decades to recover, with the hysteresis persisting until the twentieth century.

In May 1866, Overend and Gurney, a bank’s bank and one of the most prestigious financial entities in London, declared bankruptcy. A panic erupted and almost 20% of banks headquartered in London failed. Crucially, these banks had been established in the mid-nineteenth century to globalise financial markets and trade, and they operated in cities around the world.

Figure 1. Map of British credits and failures around the world


Figure 1 shows the concentration of British banking, and the degree to which the banking crisis in London affected them. Red denotes greater losses in British financing, and the size of the circles denotes the amount of lending before the crisis.

I study the impacts of the failures of British banks in London on trade activity around the world, outside of the UK, at hundreds of ports. At the extreme, losing access to all British credit caused exports to drop 80% in the year following the crisis. The aggregate global loss in trade was 17%, which is comparable to the levels seen in the latest crisis. Given that the mid-late 19th century was otherwise a period of great expansion and growth, the counterfactual without this crisis would have been even more spectacular.

The historical context also makes it possible to study the long-run effects, and I find that countries suffering the largest drops in the supply of British credit did not recover their exports to previous partners for several decades. These persistent effects suggest that losing access to financial markets can cause substantial hysteresis.

These long-term consequences of financial market instability have yet to be established for recent crises simply because not enough time has passed. But early evidence suggests that international trade has not rebounded, even ten years after the financial crisis.


by Nuno Palma (University of Manchester)

This paper provides the first annual time series of coin and money supply estimates for about six hundred years of English history.

It presents a baseline set of estimates, but also considers a variety of alternative plausible scenarios and provide several robustness checks. It concentrates on carefully setting out the details for the data construction, rather than on analysis, but the hope is that these new estimates – the longest such series ever assembled, for any country – will open new vistas to help us understand the complex interaction between the real and the monetary sides of the English economy, at both business-cycle and long-run frequencies. Many applications are possible; for instance, O’Brien and Palma (2016) use it in their analysis of the Restriction period (1797-1821). Furthermore, the new methodology set out here may serve as a blueprint for a similar reconstruction of coin and money supply series for other economies for which the analogous required data is available.

The paper proposes two new estimation methods. The first, referred to as the “direct method”, is used to measure the value of government-provided, legal-tender coin supply only. This method does not consider broader forms of money such as banknotes, deposits, inland bills of exchange, government tallies, exchequer paper or private tokens, which became increasingly important from the seventeenth century onwards. The second method is an “indirect method,” which relies on a combination of information about nominal GDP with the value of coin supply or M2 known at certain benchmark periods. This permits estimating the volume of a broader measure of money supply over time. Figure 1 shows the main results.

Figure 1. English nominal coin supply, 1270-1870 (log scale of base 2). The periods when direct method A cannot be seen means it coincides with the baseline method (aka direct method B). Source: my calculation based on a series of sources; see text for details.

This paper is forthcoming in The Economic History Review (currently available in early view), and the underlying data has now been included by the Bank of England in their historical database

To contact the author:

The Public Works Loan Board and the growth of the state in nineteenth century England

by Ian Webster

The Public Works Loan Board was formed in 1817, when the government was faced with a stagnant economy and rising unemployment after the Napoleonic wars. It was established to lend money to finance public works like road, bridge and canal building. Later in the nineteenth century, the PWLB became a major lender to local government to finance the building of workhouses, schools, sewers and water supply facilities. The PWLB still exists in the twenty first century, and is the major provider of loans to local government.

During the nineteenth century, the PWLB survived two attempts by chancellors of the exchequer to abolish it. Sometimes its decisions were overruled by Parliament which directed the PWLB to make loans which were unlikely to be repaid. The Treasury preferred to see the PWLB as a high-cost ‘last resort’ lender when the private sector wouldn’t lend. But the prevailing view of the PWLB was as a low-cost lender to reduce the cost of national public health and education policies to local ratepayers.

These debates continue today. A recent chancellor of the exchequer sought to increase the PWLB’s interest rates closer to market rates, in order to encourage more private sector lending. He also proposed the abolition of the PWLB as a body of commissioners. There is still a debate about the merits of government borrowing to improve public infrastructure.

PWLB profits and losses 1817-76
Sums lent Profits(losses)
£M £M %
Lending decisions made independently of Parliament 37.9 3.4 9%
Lending decisions made by Parliament 4.2 (2.3) (55%)
Totals 42.1 1.1 3%


The research reached three main conclusions. First, 90 per cent of the PWLB’s lending was profitable, in spite of the fact that most loans were made at below market rates of interest. The critical factor is that lending decisions were made independently and with a prime concern about the security of the loan. The remaining 10 per cent of loans were made at the direction of Parliament. In these cases, social or economic reasons overcame the PWLB’s concern about repayment, and large losses resulted. Second, seeing the PWLB as a low-cost loan provider was a victory for local interests and national spending departments, over the Treasury desire to minimise the national debt. Third, the story of the PWLB highlights five key decisions between 1859 and 1876 that contributed to the substantial growth in government activities in the late nineteenth century. Without the PWLB’s cheap loans, it would have taken longer for elementary education and constant clean water supplies to become universal services.

To contact the author:

‘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: or

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:

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.