North & South in the 1660s and 1670s: new understanding of the long-run origins of wealth inequality in England

By Andrew Wareham (University of Roehampton)

This blog is part of a series of New Researcher blogs.

Maps of England circa 1670, Darbie 10 of 40. Available at Wikimedia Commons.

New research shows that before the industrial revolution many more houses in south-east England had more fireplaces than houses in the Midlands and northern England. When Mrs Gaskell wrote North and South, she reflected on a theme which was nearly two centuries old and which continues to divide England.

Since the 1960s, historians have wanted to use the Restoration hearth tax to provide a national survey of distributions of population and wealth. But, for technical reasons until now, it has not been possible to move beyond city and county boundaries to make comparisons. 

Hearth Tax Digital, arising from a partnership between the Centre for Hearth Tax Research (Roehampton University, UK) and the Centre for Information Modelling (Graz University, Austria) overcomes these technical barriers. This digital resource provides free access to the tax returns, with full transcription of the records and links to archival shelf marks and location by county and parish. Data on around 188,000 households in London and 15 cities/counties can be searched, with the capacity to download search queries into a databasket, and work on GIS mapping is in development.

In the 1660s and 1670s, after London, the West Riding of Yorkshire and Norfolk stand out as densely populated regions. The early stages of industrialization meant that Leeds, Sheffield, Doncaster and Halifax were overtaking the former leading towns of Hull, Malton and Beverley. But the empty landscapes of north and east Norfolk, enjoyed by holiday makers today, were also densely populated then.

The hearth tax, as a nation-wide levy on domestic fireplaces, was charged against every hearth in each property, and the tax was collected twice a year at Lady Day (March) and Michaelmas (September).  In 1689 after 27 years it was abolished in perpetuity in England and Wales, but it continued to be levied in Ireland until the early nineteenth century and it was levied as a one- off tax in Scotland in 1691. Any property with three hearths and over was liable to pay the tax, and many properties with one or two hearths, such as those occupied by the ordinary poor, were exempt from the tax. (The destitute and those in receipt of poor relief were not included in the tax registers). A family living in a home with one hearth had to use it for all their cooking, heating and leisure purposes, but properties with more than three  hearths had at least one hearth in the kitchen, one in the parlour and one in an upstairs chamber. 

In a  substantial majority of parishes in northern England (County Durham, Westmorland, the East and North Ridings of Yorkshire) less than 20 per cent of households had three hearths and over, and only in the West Riding was there a significant number of parishes where 30 percent and more of households had three hearths and over. But, in southern England, across Middlesex, Surrey, southern Essex, western Kent and a patchwork of parishes across Norfolk, it was common for at least a third of the properties to have three hearths and over. 

There are many local contrasts to explore further. South-east Norfolk and north-east Essex were notably more prosperous than north-west Essex, independent of the influence of London, and the patchwork pattern of wealth distribution in Norfolk around its market towns and prosperous villages is repeated in the Midlands. Nonetheless, the general pattern is clear enough: the distribution of population in the late seventeenth century was quite different from patterns found today, but Samuel Pepys and Daniel Defoe would have recognized a world in which south-east England abounded with the signs of prosperity and comfort in contrast to the north.

Spain’s tourism boom and the social mobility of migrant workers

By José Antonio García Barrero (University of Barcelona)

This blog is part of a series of New Researcher blogs.

Spain Balearic Islands Mediterranean Menorca. Available at Wikimedia Commons.

My research, which is based on a new database of the labour force in Spain’s tourism industry, analyses the assimilation of internal migrants in the Balearic Islands during the tourism boom between 1959 and 1973.

I show that tourism represented a context for upward social mobility for natives and migrants. But the extent of upward mobility was uneven among the different groups. While natives, foreigners and internal urban migrants achieved a significant level of upward mobility, the majority faced more difficulties to improve. The transferability of human capital to the services economy and the characteristics of their migratory fluxes determined the extent of the labour attainment of the migrants.

The tourism boom constituted one of the main scenarios of the path to modernisation in Spain in the twentieth century. Between 1959 and 1973, the country transformed into one of the top tourist economies of the world, mobilising a rapid and intense demographic and landscape transformation among coastal regions of the peninsula and the archipelagos.

The increasing demand for tourism services from West European societies triggered the massive arrival of tourists to the country. In 1959, four million tourists visited Spain; by 1973, the country hosted 31 million visitors. The epicentre of this phenomenon was the Balearic Islands.

In the Balearics, a profound transformation took place. In more than a decade, the capacity of the tourism industry skyrocketed from 215 to 1,534 hotels and pensions, and from 11,496 to 216,113 hotel beds. Between 1950 and 1981, the number of Spanish-born people from outside the Balearics increased from 33,000 inhabitants to 150,000, attracted by the high labour demand for tourism services. In 1950, they accounted for 9% of the total population; in 1981, that share had reached 34.4%.

In my research, I analyse whether the internal migrants who arrived at the archipelago – mostly seasonal migrants who ended up becoming permanent residents from stagnant rural agrarian areas in southern Spain – were able to take advantage of the rapid and profound transformation of the tourism industry. Instead of putting my focus on the process of movement from agrarian to services activities, my interest was in the potential possibilities of upward mobility in the host society.

I use a new database of the workforce, both men and women, in the tourism industry, comprising a total of 10,520 observations with a wide range of personal, professional and business data for each individual up to 1970. The features of this data make it possible to analyse the careers of these workers in the emerging service industry by cohort characteristics, including variables such as gender, place of birth, language skills or firm, among others. Using these variables, I examine the likelihood of belonging to four income categories.

My results suggest that the tourism explosion opened significant opportunities for upward labour mobility. Achieving high-income jobs was possible for workers involved in hospitality and tourism-related activities. But those who took advantage of this scenario were mainly male natives and urban migrants coming from northern Spain, mainly from Catalonia, and especially from European countries with clear advantages in terms of language skills.

For natives, human and social capital made the difference. For migrants, the importance of self-selection and the transferability of skills from urban cities to the new leisure economies were decisive.

Likewise, despite lagging behind, those from rural areas in southern Spain were able to achieve some degree of upward mobility, thus reducing progressively although not completely the gap with natives. Acquiring human capital through learning-by-doing and the formation of networks of support and information among migrants from the same areas increased the chances of improvement. Years of experience, knowing where to find job opportunities and holding personal contacts in the firms were important skills.

In that sense, the way that the migrants arrived at the archipelago mattered. Those more exposed to seasonal flows of migrants faced a lower capacity for upward mobility since they were recruited in their place of origin rather than through migrant networks or returned to their homes at the end of each season.

In comparison, those who relied on migratory networks and remained as residents in the archipelago had a greater chance of getting better jobs and reducing their socio-economic distance from the natives.

COVID-19 and the food supply chain: Impacts on stock price returns and financial performance

This blog is  part of the Economic History Society’s blog series: ‘The Long View on Epidemics, Disease and Public Health: Research from Economic History’.

By Julia Höhler (Wageningen University)

As growing evidence about COVID-19 and its effects on the human body and transmission mechanisms emerges, economists are now making progress in understanding the impact of the global pandemic on the food supply chain. While it is apparent that many companies were affected, the nature and magnitude of the effects continue to require investigation.  A special issue of the Canadian Journal of Agricultural Economics on ‘COVID-19 and the Canadian agriculture and food sectors’, was among the first publications to examine the  possible effects of COVID-19 on food-supply.  In our ongoing work we take the next step and ask the question: How can we quantify the effects of COVID-19 on companies in the food supply chain?

Figure 1. Stylized image of supermarket shopping Source: Oleg Magni, Pexels

Stock prices as a proxy for the impact of COVID-19

One way to quantify the initial effects of COVID-19 on companies in the food supply chain is to analyse stock prices and their reaction over time. The theory of efficient markets states that stock prices reflect investors’ expectations regarding future dividends. If stock prices fluctuate strongly, this is a sign of lower expected returns and higher risks. Volatile stock markets can increase businesses’ financing costs and, in the worst case, threaten their liquidity. At the macroeconomic level, stock prices can also be useful to indicate the likelihood of a future recession. For our analysis of stock price reactions, we have combined data from different countries and regions. In total, stock prices for 71 large stock-listed companies from the US, Japan and European were collected. The companies’ activities in our sample cover the entire supply chain from farm equipment and supplies, agriculture, trade, food-processing, distribution, and retailing.

Impact on stock price returns comparable to the 2008 financial crisis

 We began by  calculating the logarithmic daily returns for the companies’ stocks and their average. Second, we compared these average returns with the performance of the S&P 500.  Figure 2, below,  shows the development of average daily returns from 2005 to 2020. Companies in the S&P 500 (top) achieved higher returns on average, but also exhibited higher fluctuations than the average of the companies we examined (bottom). Stock price returns fluctuated particularly strongly during the 2008 financial crisis. The fluctuations since the first notification of COVID-19 to the WHO in early January to the end of April 2020 (red area) are comparable in their magnitude. The negative fluctuations in this period are somewhat larger than in 2008. Based on the comparison of both charts, it can be assumed that stock price returns of large companies in the food supply chain were on average less affected by the two crises. Nevertheless, a look at the long-term consequences of the 2008 financial crisis suggests that a wave of bankruptcies, lower financial performance and a loss of food security may still follow.

Figure 2. Average daily returns, for the S & P 500 (top panel) and 71 food-supply companies (FSC), lower panel, 2005-2020. Source: Data derived from multiple sources. For further information, please contact the author.

Winners and losers in the sub-sectors

In order to obtain a more granular picture of the impact of COVID-19, the companies in our sample  were divided into sub-sectors, and their stock price volatility was calculated between January and April, 2020. Whereas food retailers and breweries experienced relatively low volatility in stock prices, food distributors and manufacturers of fertilizers and chemicals experienced relatively higher volatilities. In order to cross-validate these results, we collected information on realized profits or losses from the companies’ financial reports. The trends observed in  stock prices are also reflected in company results for the first quarter of 2020. Food retailers were able to increase their profits in times of crisis, while food distributors recorded high losses compared to the previous period. The results are likely related to the lockdowns and social distancing measures which altered food distribution channels.

Longer-term effects

Just as the vaccine for COVID-19 is still in the pipeline, research into the effects of COVID-19 needs time to show what makes companies resilient to the effects of unpredictable shocks of this magnitude. Possible research topics relate to the question of whether local value chains are better suited to cushion the effects of a pandemic and maintain food security. Further work is also needed to understand fully the associated trade-offs between food security, profitability, and climate change objectives. Another research question relates to the effects of government protective measures and company support programmes.  Cross-country studies can provide important insights here. Our project lays the groundwork for future research into the effects of shocks on companies in the food value chain. By combining different data sources, we were able to compare stock returns in times of COVID-19 with those of the 2008 crisis, and  identify differences between sub-sectors. In the next step we will use company characteristics such as profitability to explain differences in returns.

To contact the author: julia.hoehler[at] wur.nl

The Diaspora of a Diaspora: The Cassana and Rivarolo family network in the Atlantic, 1450-1530

By Andres Mesa (Università degli Studi di Teramo)

This research is due to be presented in the sixth New Researcher Online Session: ‘Spending & Networks’.

The Coast of Genoa, by Jasper Francis Cropsey, 1854. Available at Wikimedia Commons.

My project re-assesses the nature of Genoese family networks in the Atlantic, at the end of the fifteenth and early sixteenth centuries. The canonical understanding of these networks is based on three observations: family networks were highly co-dependent, centralized, and that Genoa was the centre of operations for all the Genoese. My research shows a multitude of scenarios and provides new explanations for these observations. Using a case study of the Rivarolo-Cassana family network, I show that this particular network functioned more in terms of cooperation, using a pluricentric language. As the title suggests, the economic endeavours of these merchants involved  a complex migration process. Consequently, their trading activities coincided with the interests of those in permanent settlements.

Genoese merchants chose cities in the Iberian peninsula for their homes and as a base for their  business activities. For example, Lisbon, Seville, and Valencia had a significant permanent Genoese population who were in the process of becoming naturalized Spanish and Portuguese citizens. In turn, some of the families that dominated the economic landscape of the 15th and 16th centuries disappeared in Genoa. Yet, their descendants still appear in Portugal and Spain with their original Ligurian surnames altered into Castilian or Portuguese.

The findings from my study indicate the need for a major reassessment of our understanding of Genoese family networks. The data I have collected shows that most of the day-to-day trade happened outside the family network, and the contractual relationships that emerged between partners  extended well beyond familial ties. Because the structure of private property ownership was connected to new interests and new markets, it was inevitable that these, in turn, were linked to the discovery of new lands. Consequently, The Genoese adopted a new business model based on owning the means of production for the goods they traded, particularly soap, wheat, and sugar.

Finally, I argue that the economic ties between families and family members, did not always translate into a share of business responsibility or welfare. The relationships and partnerships functioned in terms of very particular historical and geographical contexts. The contracts were between ‘individuals (Societas) to share losses and gains.’ Thus, liability was an individual matter despite the frequent use of jurists.


Andrés Mesa

Twitter: @mesaandres

Strangling Speculation: The Effects of the 1903 Viennese Futures Trading Ban

By Laura Wurm (Queen’s University Belfast)

This blog is part of a series of New Researcher blogs.

 

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Farmland in Dalat, Vietnam. Available at Wikimedia Commons.

 

Ever since the emergence of futures markets and speculation, the effects of futures trading on spot price volatility have been subject to intense debate. While the populist discourse affirms the adverse and price-disturbing consequences of futures trading, the work of scholars stresses the risk allocation and information transmission function of futures towards spot markets, essential for pricing cash transactions. My research tests whether these volatility-lowering effects of futures trading towards the cash market hold true by assuming the opposite: what happens if futures trading no longer exists?

To do so, I go back to the early 20th century, when futures trading in the Viennese grain market was, unlike at other trade locations at the time, such as Germany, England, or Texas, banned permanently. The 1903 parliament-enforced prohibition of futures trading was the consequence of an aversion against speculators, who were blamed for “never having held actual grain in their hands”. Putting an end to the vibrant futures market of the Agricultural Products Exchange, the city’s gathering place for farmers, millers, large-scale customers, and speculators, was thought to be the last resort to curb undue speculation. Up to the present day, futures trading has not been resumed. The uniqueness of this ban makes it an ideally suited natural experiment to test the effects of futures trading and its abolishment on spot price volatility. Prices from the Budapest Stock and Commodity Exchange, which was not affected by the ban, are used as a synthetic control. The Budapest market, as part of the Austro-Hungarian Empire, operated under similar legal-economic and geographic conditions, and was, in addition to Vienna, the only Austro-Hungarian market offering a trade in futures. This makes Budapest an ideally suited control.

My project examines the information transmission function of futures to spot markets and finds a heightened spot price volatility in Vienna and a lower accuracy in pricing cash transactions after futures trading was banned. The intra-day variation of spot prices increased after the ban. Without futures trading, the Viennese market lacked pricing accuracy and efficiency. The effect on volatility holds true when using a commodity traded exclusively on the Viennese spot market as a control. In addition, assessing Granger causality, information flows between the futures and spot markets of the two cities are found to have existed prior to the ban, which links to the information transmission function of futures towards cash markets and the close ties between the two markets. After futures trading was prohibited in Vienna, Budapest futures prices with 3-6 months maturity continued to significantly Granger-cause Viennese spot prices.

 

 


Laura Wurm

lwurm01@qub.ac.uk

 

The international role of sterling before the EU: Britain operated a captive market for sterling (NR Online Session 1)

By Maylis Avaro (Graduate Institute, Geneva & University Libre de Bruxelles)

This research is due to be presented in the first New Researcher Online Session: ‘Finance, Currency & Crisis’.


 

Pre-EU sterling was of a zombie international currency, maintained by British authorities through threats and controls on the Commonwealth countries.

Avaro1
Queen Elizabeth II and the Prime Ministers of the Commonwealth Nations, at Windsor Castle (1960 Commonwealth Prime Minister’s Conference) @wikicommons.

Post-Brexit Britain is looking for new partners to build new special relationships and replace EU single market. Eurosceptics from the Conservative party have urged the UK government to focus on the British Commonwealth[1]. But my research shows that pre-EU monetary relations between the UK and Commonwealth countries were built at the advantage of the British economy and investment in sterling assets inflict losses to Commonwealth central banks. Post-WWII international role  of sterling in the sterling area was artificially maintained by British authorities through capital controls, commercial threats and economic sanctions. Commonwealth countries fought to disentangle themselves from the UK economy and sterling. At the light of these new results, it seems difficult to make the sterling area rise from the ashes.

 

A zombie international currency

Sterling was the dominant international currency in the 19th century but lost it to the dollar over the course of the 20th century. Post-WWII, Western economies lost interest in sterling which remained mostly a regional currency, used in the sterling area – a network of countries tying their currencies to sterling, including most of Commonwealth, British Empire, and newly independent colonies.

The regionalization of sterling was immediate after the war, as reflected in its presence within central banks’ reserves portfolios displayed in Fig.1. In Western European central banks, sterling represented less than 20% of their reserves while sterling area countries kept more than 50% of their reserves in sterling throughout the fifties and sixties.

Avaro2
Figure 1: Shares of sterling in central banks’ reserves (gold + foreign exchange)
Reading: In 1955, sterling represented 89% of the official reserves of Overseas Sterling Area and 6% of the official reserves of Western Europe countries.
Source: see author’s working paper.

 

Countries who could access alternative foreign exchange reserves, such as Western Europe held only very limited amounts of sterling because the UK didn’t have the economic fundamentals of an issuer of international currency: its GDP per capita was growing slower than the rest of Europe, its share in world trade was going down, its central bank ran low reserves and it faced military defeats in its collapsing Empire.

 

The sterling area as a captive market

If sterling was a bad investment, why would Commonwealth and Middle East countries central banks keep most of their reserves in sterling? I argue that British authorities operated the sterling area countries as captive market for sterling. They artificially maintained holdings of sterling through capital controls, commercial threats and economic sanctions. Exiters of the sterling area, such as Egypt in 1947 or Iraq in 1959 faced a full freeze of their assets held in London, imposition of new tariffs or a limitation of access to the London capital market. Large sterling holders, such as Australia or Ireland tried to decrease their exposure to sterling by secretly converting some of their sterling reserves.

By preventing free convertibility out of sterling, British authorities could maintain an over-evaluation of sterling as the Bank of England ran very low reserves after the war. British policymakers described the sterling area as a bank with insufficient assets to meet its deposit liabilities. The area eventually collapsed after the 1967 sterling devaluation and Britain adhesion to EEC.

My study on the decline of sterling suggests that, at the time of Britain accession to the EEC, economic links with its former colonies had decreased dramatically, in spite of British efforts. Britain’s next ‘special relationship’ partners may not lie among them.

 

Notes

[1] “Theresa May to offer Commonwealth post-Brexit bonus” https://www.ft.com/content/2fbb7964-3e3c-11e8-b9f9-de94fa33a81e


 

Maylis Avaro

maylis.avaro@graduateinstitute.ch

Twitter: @M_Avaro

Website: maylisavaro.info

 

Taxation and Wealth Inequality in the German Territories of the Holy Roman Empire 1350-1800

by Victoria Gierok (Nuffield College, Oxford)

This blog is part of our EHS Annual Conference 2020 Blog Series.

 

OLYMPUS DIGITAL CAMERA
Nuremberg chronicles – Kingdoms of the Holy Roman Empire of the German Nation. Available at Wikimedia Commons.

Since the French economist, Thomas Piketty, published Capital in the 21st Century in 2014, it has become clear that we need to understand the development of wealth and income inequality in the long run. While Piketty traces inequality over the last 200 years, other economic historians have recently begun to explore inequality in the more distant past,[1] and they report striking similarities of increasing economic inequality from as early as 1450.

However, one major European region has been largely absent from the debate: Central Europe — the German cities and territories of the Holy Roman Empire. How did wealth inequality develop there? And what role did taxation play?

The Holy Roman Empire was vast, but its borders fluctuated greatly over time. As a first step to facilitating analysis, I  focus on cities in the German-speaking regions.  Urban wealth taxation developed early in many of the great cities, such as Cologne and Lübeck. By the fourteenth century, wealth taxes were common in many cities. They are an excellent source for getting a glimpse at wealth inequality (Caption 1).

 

Caption 1. Excerpt from the wealth tax registers of Lübeck (1774-84).

Gierok1
Source: Archiv der Hansestadt Lübeck. Archival reference number: 03.04-05 01.02 Johannis-Quartier: 035 Schoßbuch Johannis-Quartier 1774-1784

 

Three questions need to be clarified when using wealth tax registers as sources:

  • Who was being taxed?
  • What was being taxed?
  • How were they taxed?

 

The first question was also crucial to contemporaries because the nobility and clergy adamantly defended their privileges which excluded them from taxation. It was Citizens and city-dwellers without citizenship who mainly bore the brunt of wealth taxation.

 

Figure 1. Taxpayers in a sample of 17 cities in the German Territories of the Holy Roman Empire.

Gierok2
Note: In all cities, citizens were subject to wealth taxation, whereas city-dwellers were fully taxed in only about half of them.
Source: Data derived from multiple sources. For further information, please contact the author.

 

The cities’ tax codes reveal a level of sophistication that might be surprising. Not only did they tax real estate, cash and inventories, but many of them also taxed financial assets such as loans and perpetuities (Figure 2).

 

Figure 2. Taxable wealth in 19 cities in the German Territories of the Holy Roman Empire.

Gierok3
Note: In all cities, real estate was taxed, whereas financial assets were taxed only in 13 of them.
Source: Data derived from multiple sources. For further information, please contact the author.

 

Wealth taxation was always proportional. Many cities established wealth thresholds below which citizens were exempt from taxation, and basic provisions such as grain, clothing and armour were also often exempt. Taxpayers were asked to estimate their own wealth and to pay the correct amount of taxes to the city’s tax collectors. To prevent fraud, taxpayers had to swear under oath (Caption 2).

 

Caption 2. Scene from the Volkacher Salbuch (1500-1504) shows the mayor on the left, two tax collectors at a table and a taxpayer delivering his tax payment while swearing his oath.

Gierok4
Source: Image: Pausch, Alfons & Jutta Pausch, Kleine Weltgeschichte der Steuerobrigkeit, 1989, Köln: Otto Schmidt KG, p.75

 

Taking the above limitations seriously, one can use tax registers to trace long-run wealth inequality in cities across the Holy Roman Empire (Figure 3).

 

Figure 3. Gini Coefficients showing Wealth Inequality in the Urban Middle Ages.

Gierok5
Source: Guido Alfani, G.,  Gierok, V., and Schaff, F.,  “Economic Inequality in Preindustrial Germany, ca. 1300 – 1850”.  Stone Center Working Paper Series, February 2020, no. 03.

 

Two main trends emerge: First, most cities experienced declining wealth inequality in the aftermath of the Black Death around 1350. The only exception was Rostock, an active trading city in the North. Second, from around 1500, inequality was rising in most cities until the onset of the Thirty Years War (1618-1648). This war, in which large armies marauded through German lands bringing along plague and other diseases, as well as the shift in trade from the Mediterranean to the Atlantic, might be the reason for the decline seen in this period. This sets the German lands apart from the development of inequality in other European regions, such as Italy and the Netherlands, in which inequality continued to rise throughout the early modern period.

 

Notes

[1] Milanovic, B., Lindert, P.H., and  Williamson, J.,  ‘Pre-Industrial Inequality’, Economic Journal 121, no. 551 (2011): 255-272;  Guido, A. ‘Economic Inequality in Northwestern Italy: A Long-Term View’, Journal of Economic History 75, no. 4 (2015): 1058-1096; Guido, A.,  and Ammannati, F.,  ‘Long-term trends in economic inequality: the case of the Florentine state, c.1300-1800’, Economic History Review 70, 4 (2017): 1072-1102; Wouter, R.,  ‘Economic Inequality and Growth before the Industrial Revolution: The Case of the Low Countries’,  European Review of Economic History 20, no. 1 (2016): 1-22;  Reis, J.,  ‘Deviant Behavior? Inequality in Portugal 1565-1770’,  Cliometrica 11, no. 3  (2017): 297-319; Malinowski, M.,  and  van Zanden J.L., ‘Income and Its Distribution in Preindustrial Poland’, Cliometrica 11, no. 3 (2017): 375-404.

 


 

Victoria Gierok: victoria.gierok@nuffield.ox.ac.uk

 

 

 

 

The South Sea Bubble 300 Years On

by William Quinn (Queen’s University, Belfast)

A special issue on the Tricentenary of the South Sea Bubble was published on The Economic History Review as open access, and it is available at this link

The South Sea Bubble, a Scene in 'Change Alley in 1720 1847, exhibited 1847 by Edward Matthew Ward 1816-1879
Edward Matthew Ward (1847) The South Sea Bubble, a Scene in ‘Change Alley in 1720. Available at Tate Gallery

In 1720, the British Parliament approved a proposal from the South Sea Company to manage the government’s outstanding debt. The Company agreed to issue shares, some of which would be bought using government annuities rather than cash. The Company would then pay the government a reduced rate of interest on these annuities. The government’s debt burden would be reduced, and in exchange, the Company believed it had gained the opportunity to establish itself as a competitor to the Bank of England (Kleer, 2012).

Superficially, the scheme didn’t make much sense. How would the public be convinced to exchange lucrative government annuities for equity in a company whose main asset was a reduced rate of interest on those annuities? The trick was to lure annuity holders with the promise of capital gains on South Sea shares. Consequently,  the Company’s directors, with the implicit support of the government, engineered a bubble, primarily by creating a liquid secondary market for their shares, then extending huge amounts of credit to investors to flood the market with cash (Dickson, 1967). This strategy was too successful:  the scale of the bubble subsequently  provoked a backlash that ruined the South Sea directors (Kleer, 2015).

Picture 1ss
Figure 1. South Sea Company Share Price (£) and Subscriptions, 1719-20. Source: European State Finance Database

Almost as interesting as the scheme itself is how the memory of this event evolved.  A century later, the scheme was recounted as a sorry episode in the nation’s history, an economic disaster never to be repeated (Anderson, 1801). In the mid-nineteenth century it was remembered as an outbreak of collective madness, a cautionary tale for ordinary people on the dangers of being caught up in a speculative frenzy (Mackay, 1852). More recently, the Bubble  has been used as a case study to assess the efficiency of financial markets (Dale et al., 2005, 2007; Shea, 2007).

But, how should it be remembered? None of the available data suggests that 1720 was in any way an economic disaster, which is unsurprising, since participation in the scheme was much too low to have had systemic economic effects (Hoppit, 2002). Others have suggested that the Bubble Act, which accompanied the bubble, hamstrung British finance for the next century. But Harris (1994, 1997) has shown that much of what the Bubble Act outlawed had already been illegal, and as a result, it was almost never invoked.

Remembering 1720 as a sudden outbreak of madness would let the government off the hook: the bubble did not emerge spontaneously, but was deliberately created (Dickson, 1967). The level of political involvement in the market also makes it an unsuitable test case for the efficient markets hypothesis, and in any case, the structure of stock markets in 1720 was so radically different from today that they are unlikely to tell us much about the efficiency of modern markets.

Perhaps, then, the most significant feature of the South Sea scheme was its success. Prior to 1720, Britain’s debt burden was an existential threat, as it kept interest rates high, making it very expensive to fund warfare. The South Sea conversion scheme significantly reduced this burden. In France, the unwinding of the Mississippi scheme led to the reinstatement of  debt at its pre-1720 level (Velde, 2006). But in the aftermath of the South Sea scheme, the British government managed to sustain the improvement in its debt position, largely by redirecting the anger of ruined investors towards the scapegoated South Sea directors (Quinn and Turner, 2020). This allowed it to borrow at much lower interest rates, giving the country a major advantage in subsequent wars. After 300 years, is it time to start remembering the South Sea Bubble as a net positive for Britain?

 

To contact the author: W.Quinn@qub.ac.uk

 

References

Anderson, A. ‘An extract from The Origin of Commerce (1801)’ in R.B. Emmett (ed.), Great Bubbles Volume 3, London: Pickering and Chatto, 2000.

Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Financial markets can go mad: Evidence of irrational behaviour during the South Sea Bubble’, Economic History Review58, 233-71, 2005.

Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Pitfalls in the quest for South Sea rationality’, Economic History Review, 60, 766-772, 2007.

Dickson, P.G.M. The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756. London: Macmillan, 1967.

Harris, R. ‘The Bubble Act: Its passage and its effects on business organization’, Journal of Economic History54, 610-27, 1994.

Harris, R. ‘Political economy, interest groups, legal institution, and the repeal of the Bubble Act in 1825’, Economic History Review, 50, 675-96, 1997.

Hoppit, J. ‘The myths of the South Sea Bubble’, Transactions of the Royal Historical Society, 12, 141-65, 2002.

Kleer, R. ‘“The folly of particulars”: The political economy of the South Sea Bubble’, Financial History Review19, 175-97, 2012.

Kleer, R. A. ‘Riding a wave: The Company’s role in the South Sea Bubble’, Economic History Review68, 264-85, 2015.

Mackay, C. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, London: Robson, Levey and Franklin, 2nd edition, 1852.

Quinn, W. and Turner, J.D. Boom and Bust: A Global History of Financial Bubbles, Cambridge: Cambridge University Press, 2020.

Shea, G. S. ‘Financial market analysis can go mad (in the search for irrational behaviour during the South Sea Bubble)’, Economic History Review60, 742-65, 2007.

Velde, F. ‘John Law’s System and Public Finance in 18th c. France.’ Federal Reserve Bank of Chicago, 2006.

 

How JP Morgan Picked Winners and Losers in the Panic of 1907: The Importance of Individuals over Institutions

by Jon Moen (University of Mississippi) & Mary Rodgers (SUNY, Oswego).

This blog is part of our EHS 2020 Annual Conference Blog Series.

 

Moen 1
A cartoon on the cover of Puck Magazine, from 1910, titled: ‘The Central Bank – Why should Uncle Sam establish one, when Uncle Pierpont is already on the job?’. Available at Wikimedia Commons.

 

We study J. P. Morgan’s decision making during the Panic of 1907 and find insights for understanding the outcomes of current financial crises.  Morgan relied as much on his personal experience as on formal institutions like the New York Clearing House, when deciding how to combat the Panic. Our main conclusion is that lenders may rely on their past experience during a crisis rather than on institutional and legal arrangements in formulating a response to a financial crisis. The existence of sophisticated and powerful institutions like the Bank of England or the Federal Reserve System may not guarantee optimal policy responses if leaders make their decisions on the basis of personal experience rather than well-established guidelines.  This will result in decisions yielding sub-par outcomes for society compared to those made if formal procedures and data-based decisions had been proffered.

Morgan’s influence in arresting the Panic of 1907 is widely acknowledged. In the absence of a formal lender of last resort in the United States, he personally determined which financial institutions to save and which to let fail in New York. Morgan had two sources of information about the distressed firms: (1) analysis done by six committees of financial experts he assigned to estimate firms’ solvency and (2) decades of personal experience working with those same institutions and their leaders in his investment banking underwriting syndicates. Morgan’s decisions to provide or withhold aid to the teetering institutions appears to track more closely with his prior syndicate experience with each banker, rather than with the recommendations made by committees’ analysis of available data. Crucially, he chose to let the Knickerbocker Trust fail despite one committee’s estimate it was solvent and another’s that it had too little time to make a strong recommendation. Morgan had had a very bad business experience with the Knickerbocker and its president,  Charles Barney, but he had had positive experiences with all the other firms requesting aid. Had the Knickerbocker been aided, the panic might have been avoided all together.

The lesson we draw for present day policy is that the individuals responsible for crisis resolution will bring to the table policies based on personal experience that will influence the crisis resolution in ways that may not have been expected a priori. Their policies might not be consistent with the general well-being of the financial markets involved, as may have been the case with Morgan letting Knickerbocker fail.  A recent example that echoes the experience of Morgan in 1907 can be seen in the leadership of Ben Bernanke, Timothy Geithner and Henry Paulson during the financial crisis in 2008.  They had a formal lender of last resort, the Federal Reserve System, to guide them in responding to the crisis in 2008.  While they may have had the well-being of financial markets more in the forefront of their decision making from the start, controversy still surrounds the failure of Lehman Brothers and the lack of support to provide them with a lifeline from the Federal Reserve.  The latter could have provided aid, and this reveals that the individuals making the decisions, and not the mere existence of a lender of last resort institution and the analysis such an institution will muster, can greatly affect the course of a financial crisis.  Reliance on personal experience at the expense of institutional arrangements is clearly not limited only to the responses made to financial crises.  The coronavirus epidemic is one such example worth examining with this framework.

 


Jon Moen – jmoen@olemiss.edu

Are university endowments really long-term investors?

by David Chambers, Charikleia Kaffe & Elroy Dimson (Cambridge Judge Business School)

This blog is part of our EHS 2020 Annual Conference Blog Series.

 

 

Flags of the Ivy League
Flags of the Ivy League fly at Columbia’s Wien Stadium. Available at Wikimedia Commons.

 

Endowments are investment funds aiming to meet the needs of their beneficiaries over multiple generations and adhering to the principle of intergenerational equity. University endowments such as Harvard, Yale and Princeton, in particular, have been at the forefront of developments in long-horizon investing over the last three decades.

But little is known about how these funds invested before the recent past. While scholars have previously examined the history of insurance companies and investment trusts, very little historical analysis has been undertaken of such important and innovative long-horizon investors. This is despite the tremendous influence of the so-called ‘US endowment model’ of long-horizon investing – attributed to Yale University and its chief investment officer, David Swensen – on other investors.

Our study exploits a new long-run hand-collected data set of the investments belonging to the 12 wealthiest US university endowments from the early twentieth century up to the present: Brown University, Columbia University, Cornell University, Dartmouth College, Harvard University, Princeton University, the University of Pennsylvania, Yale University, the Massachusetts Institute of Technology, the University of Chicago, Johns Hopkins University and Stanford University.

All are large private doctoral institutions that were among the wealthiest university endowments in the early decades of the twentieth century and which made sufficient disclosures about how their funds were invested. From the latter, we estimate the annual time series of allocations across major asset classes (stocks, bonds, real estate, alternative assets, etc.), endowment market values and investment returns.

Our study has two main findings. First, we document two major shifts in the allocation of the institutions’ portfolios from predominantly bonds to predominantly stocks beginning in the 1930s and then again from stocks to alternative assets beginning in the 1980s. Moreover, the Ivy League schools (notably, Harvard, Yale and Princeton) led the way in these asset allocation moves in both eras.

Second, we examine whether these funds invest in a manner consistent with their mission as long-term investors, namely, behaving countercyclically – selling when prices are high and buying when low. Prior studies show that pension funds and mutual funds behave procyclically during crises – buying when prices are high and selling when low.

In contrast, our analysis finds that the leading university endowments on average behave countercyclically across the six ‘worst’ financial crises during the last 120 years in the United States: 1906-1907, 1929, 1937, 1973-74, 2000 and 2008. Hence, typically, during the pre-crisis price run-up, they decrease their allocation to risky assets but increase this allocation in the post-crisis price decline.

In addition, we find that this countercyclical behaviour became more pronounced in the two most recent crises – the Dot-Com Bubble and the 2008 Global Financial Crisis.